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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period
from...................to.................
Commission file number 0-21758
DIAGNOSTIC HEALTH SERVICES, INC.
(Name of small business issuer in its charter)
DELAWARE 22-2960048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2777 STEMMONS FREEWAY, SUITE 1525, DALLAS, TEXAS 75207
(Address of principal executive offices)
Issuer's telephone number: (214)634-0403
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.001 par value NASDAQ National Market
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No______
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the Common voting stock based on a closing
price on the NASDAQ National Market on March 1, 1999 of $1.78 per share held by
non-affiliates of the registrant was $19,295,038.
The number of shares outstanding of the registrant's Common Stock, $.001
par value, as of March 1, 1999 was 11,481,636.
Documents Incorporated by Reference: None
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PART I
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ITEM 1. BUSINESS
THE COMPANY
Diagnostic Health Services, Inc. ("DHS" or the "Company") is a leading outsource
provider of medical support services to hospitals, physicians' offices and other
healthcare facilities in the Midwest, West and South Central United States. DHS
primarily provides radiology and cardiology diagnostic services and equipment,
as well as departmental management services, to healthcare facilities on an in-
house and shared basis.
The Company was incorporated in Texas in 1983 and was reincorporated in Delaware
in 1992. The Company is headquartered in Dallas, Texas, and provides services
in Texas, Oklahoma, Illinois, Indiana, Louisiana, Mississippi, Missouri, Iowa,
Ohio, Michigan, Arkansas, Georgia, Alabama, Virginia, Kentucky, Tennessee, New
Mexico, Arizona, Nevada and California. Until the sale of such operations in
December 1997, the Company also provided services in the greater Mexico City
area.
In addition to significant internal growth, the Company has expanded its
business through numerous acquisitions. Information regarding acquisitions in
the past two fiscal years is included in the footnotes to the audited financial
statements appearing at Item 8 below.
The following chart sets forth the corporate structure of the Company and its
subsidiaries at March 1, 1999:
[CHART APPEARS HERE]
In addition, DHS and DHSMS have two inactive wholly-owned subsidiaries,
Diagnostic Health Services de Mexico, S.A. de C.V. and HomeCare International,
Inc., and DHS has formed a new subsidiary (MAI Acquisition Corp.) for purposes
of a pending acquisition. SoCal owns a 50% partnership interest in Scripps
Chula Vista Imaging Center, L.P., which is accounted for on the equity method.
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BUSINESS OPERATIONS
In-House Services (also referred to as Fixed Site Services)
- --------------------------------------------------------------
The Company provides diagnostic services within hospitals and clinical radiology
or cardiology departments. These services include the provision of the allied
healthcare professionals (technologists) who staff the equipment and are
responsible for image acquisition; the provision and management of diagnostic
equipment or other related instrumentation; the management and processing of
data for the procedures conducted within the respective department; and in some
instances the provision, via subcontracting, of the professional component
(interpretation) of the data by a physician.
These in-house services may include any or all of the aforementioned
responsibilities. The imaging modalities under management include, but are not
limited to, diagnostic ultrasound, computerized tomography, MRI, nuclear
medicine, and cardiac catherization services.
Generally, the Company is responsible for various quality assurance programs
related to the services it provides and assumes documentation responsibility and
management oversight of departmental compliance issues, licenses, accreditation
and certification requirements.
At December 31, 1998, the Company provided in-house services at 138 hospitals
and other health care facilities throughout its operational markets.
Shared Services
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The Company operates a fleet of specially equipped vehicles (vans and trucks) to
transport its imaging equipment to hospitals, clinics, long-term care facilities
and other healthcare settings. The services provided via the shared services
delivery mechanism are predominantly diagnostic ultrasound, for which the
equipment is portable and service is rendered on an "as needed" basis. This
includes a large number of regular and routed schedules as well as "on call"
services to customers in response to emergent demand.
At year-end 1998, the Company provided shared services to 290 of its
approximately 394 hospital customers and approximately 844 additional clients
across the healthcare spectrum, including physicians' offices, sub acute and
long-term care facilities, managed care systems, and government facilities.
Ancillary Services
- -------------------
At various of its service sites, the Company provides temporary staffing and
cardiac monitoring services, such as Holter monitoring, pacemaker monitoring and
event recording for patients of the Company's customers. In addition, until the
sale of such operations in December 1997, the Company maintained an operating
unit providing contract occupational and physical therapists on a long or short
term basis to healthcare facilities throughout the United States, and provided
(through a separate subsidiary) therapists and nurses in a home healthcare
setting in the Mexico City and surrounding areas. The Company currently has no
plans to re-enter the therapist placement business or the Mexican market.
CUSTOMERS
Each of the Company's customers, irrespective of the method by which they are
served, has an agreement or contract specifying the terms of service, including
the nature of services, pricing, payment and other material terms. The
Company's agreements for in-house services typically have a duration of three to
five years and specify equipment and personnel requirements, the scope and types
of services to be provided and the pricing and payment structure. In addition
to certain longer term contracts, the Company performs a material portion of its
work under one-year contracts, or on a month-to-month basis. Non-renewal of
such contracts, or renewal on less favorable terms, could have a material
adverse effect on the Company's revenues, operating margins, and net income. If
the affected accounts were
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obtained in one of the Company's business acquisitions, the goodwill related to
that acquisition could also become materially impaired. If such circumstances
arise, the Company records an impairment loss as the difference between the
estimate of the related after-tax income contribution, and the carrying value of
the goodwill. Any impairment loss would be reported as a component of income
from continuing operations before tax.
In 1997 and 1998, no single customer of the Company accounted for more than 10%
of the Company's total revenues and the three largest customers of the Company
accounted in the aggregate for approximately 3% of the Company's revenues in
1997 and approximately 4% of the Company's revenues in 1998. In most cases, the
hospital or healthcare facility (which is the Company's customer) is the
responsible payment party. Third party payors accounted for approximately 9% and
28% of the Company's revenues in 1997 and 1998, respectively. Although the
Company is not substantially reliant upon third-party payment mechanisms, many
of the Company's customers are reliant on third-party payment, and delays or
difficulties in third-party payments could thereby adversely affect the receipt
and timing of payments to the Company.
From 1991 to 1998, the Company's customer base increased from 323 (including
seven in-house agreements) to approximately 1,238. Customers in 1998 included
394 hospitals (which included 138 in-house agreements) and 844 physicians'
offices, clinics and healthcare facilities in 20 states.
In 1998, the Company's revenues were attributable to shared services, in-house
services and ancillary services, in the following approximate proportions:
In-House/Fixed Site 50%
Shared 42%
Ancillary 8%
OPERATING STRUCTURE
Through the implementation of a deliberate acquisition strategy, the Company has
established a network of operational facilities throughout the country. These
division offices, located in Arlington, TX, San Diego, CA, Phoenix, AZ, Tulsa,
OK, St. Louis, MO, Chicago, IL, Atlanta, GA, Monroe, LA and Huntsville, AL,
serve as an operations base for both clinical staff, local management and sales.
By keeping these functions local, the Company remains responsive to its customer
base as well as to opportunities for expansion and development within the
Company's markets.
The Company provides local personnel with a comprehensive range of support
services, including financial and administrative services, and employs a
mechanism, which carefully monitors local operations through an extensive system
of controls, including regular financial reporting, accounts receivable analysis
and customer tracking. The Company provides administrative functions at the
corporate level, including receivables management, purchasing, human resources
and accounting, thereby eliminating the duplicative expenses that would arise if
these services were provided locally.
MANAGEMENT INFORMATION SYSTEMS
The Company has configured an information technology system that provides real-
time monitoring of services, procedures and other business activities at all of
the Company's divisional offices. This enables the Company to monitor services,
revenues and costs on a Company-wide basis. The Company has made substantial
investments in the development of this system and all of the Company's business
offices are networked into the information technology system and integrated with
the Company's centralized processing system. This system also contributes to the
Company's sales and marketing efforts by enabling the sales force to formulate
quotations and pricing proposals to potential customers and to provide
management with information specific to existing customers. The Company made
significant additional investments in the upgrade and expansion of this system
in 1997, and believes that
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its information technology system can support substantial growth without
requiring significant further capital expenditures.
SALES AND MARKETING
The Company directs its sales and marketing activities from its Dallas
headquarters, and out of each of its operating divisions. Each operating
division has at least one, and in some instances more than one, sales
representative devoted full-time to promotion of the Company's business and the
maintenance and expansion of existing relationships. Additionally, each division
manager as well as the regional vice presidents devotes portions of their time
to customer relations and marketing functions.
COMPETITION
Radiology and cardiology diagnostic services are characterized by a high degree
of competition. This competition comes from a number of independent local
operators specializing in one or two clinical applications, and from a few large
diversified healthcare companies (primarily larger hospitals having the
resources and capability to provide shared diagnostic services to other
healthcare facilities) which provide these services as part of their overall
business. Although the Company believes that it has a competitive advantage over
most of the small operators (primarily because most of them do not provide the
full range of services offered by the Company, and do not have the same volume
of revenues to absorb necessary fixed overhead costs), the Company may be
vulnerable to competition from the larger healthcare companies, at least one of
which can be found in each of the Company's geographic markets, and all of which
are substantially larger and possess greater financial resources than the
Company. There can be no assurance that the Company will be able to compete
successfully in its markets.
SEASONALITY
The Company's results of operations have, in some years, varied significantly
from quarter to quarter, for reasons particular to each quarter. For instance,
hospital admissions and doctor visits (and, therefore, the Company's imaging
revenues) are typically lower during holiday periods, and at other times when
physicians traditionally take their own vacations.
SUPPLIERS
Although the Company has historically acquired most of its imaging and other
equipment through finance leases from a small number of suppliers, the Company
is not dependent upon any one supplier or group of suppliers. While the Company
has a preference for the equipment manufactured by certain manufacturers, there
are a number of manufacturers of imaging equipment adequate for the Company's
purposes, and an even greater number of companies from whom such equipment can
be leased. The Company believes that alternate sources for its equipment and
supply needs are readily available at comparable costs, and that its
relationships with its suppliers are satisfactory.
PATENTS OR TRADEMARKS
Although the Company relies upon sophisticated equipment, instrumentation and
technology, the Company does not own, license or otherwise rely upon any patents
or trademarks for the operation of its business. Other than corporate names,
the Company does not own or utilize any trademarks in its business.
GOVERNMENT REGULATION
Many aspects of the healthcare industry in the United States are presently
subject to extensive federal and state government regulation. Certain of these
laws and regulations are applicable to the Company's business. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes that its operations are in material compliance
with all applicable laws.
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Federal Kickback Law
Federal law prohibits the offer, solicitation, payment or receipt of any
remuneration (direct or indirect, overt or covert, in cash or in kind) which is
intended to induce, or is in return for, the referral of patients for, or the
ordering of, items or services reimbursable by Medicare or Medicaid. The law
also prohibits remuneration intended to induce the purchasing of, or arranging
for, or recommending the purchase or order of any item, good, facility or
service for which payment may be in whole or in part under those programs.
Under this statute, known as the "kickback law," an offense may be punished by
criminal prosecution or by excluding any of the parties to the transaction or
arrangement from participation in Medicare and Medicaid. The law is very broad
and has been interpreted to apply to otherwise legitimate investment interests
if one purpose of the offer of an opportunity to invest is to induce referrals
from the investors. Regulations implemented under the kickback law provide
certain "safe harbors" giving protection for certain categories of
relationships.
The breadth of the kickback law is such that virtually any financial
relationship between a practitioner and a healthcare provider, such as an
independent physiological laboratory (IPL) or an independent diagnostic testing
facility (IDTF), involving the offering of Medicare and Medicaid services may
trigger the application of the law.
A substantial portion of the Company's business arrangements involves the
management and staffing of in-house diagnostic laboratories at hospitals. The
Company does not lease space from the hospitals or any other providers with whom
it contracts and does not bill Medicare or Medicaid for the technical services
provided at the hospitals' laboratories. The Company believes that its
relationships with hospitals and other care providers are in compliance with the
Federal kickback law.
Federal Stark Laws
Federal law also prohibits physicians from ordering or prescribing certain
designated healthcare services or items if the service or item is reimbursable
by Medicare or Medicaid and is provided by an entity with which the physician
has a financial relationship (including investment interests and compensation
arrangements). Payment for a service provided in violation of these laws, known
as the "Stark Laws," may be denied, or money paid may be recouped.
The services specified by the Stark Laws include ultrasound procedures and other
designated services, which are provided by the Company as the result of
referrals from physicians who purchase the tests from the Company. The Company
believes that its relationships with referring physicians are in compliance with
the Stark Laws.
State Law
A number of states, including states in which the Company does business, have
laws and regulations similar to the federal kickback laws and Stark Laws. The
Company believes that it is in compliance with all of such laws, although, as is
the case with federal law, there can be no assurance that changes in such laws
or the interpretation or enforcement of such laws will not have a material
effect on the Company.
IDTFs
The Company must satisfy certain rules set forth by the Health Care Financing
Administration ("HCFA") relating to the payment of services to Medicare or
Medicaid beneficiaries. These rules state that the carriers will pay for
services under the Medicare fee schedule only when performed by a physician, a
group practice of physicians, an approved supplier of portable x-ray services,
or an IDTF. The current effective date for IDTF status is March 15, 1999,
however this date is subject to change. The Company believes that its services
are provided according to the rules and specifications of an IDTF.
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Potential National Healthcare Reform
Both the Clinton Administration and the Congress have periodically asserted a
need to overhaul or reform the nation's healthcare system. Such legislative
initiatives, if enacted, could impose pressures on the pricing structures
applicable to the Company's services. In particular, there is a possibility that
an even greater portion of healthcare services will be rendered and administered
through "managed care" systems, which could have the effect of forcing pricing
concessions and reductions on the part of service providers such as the Company.
Moreover, healthcare reform could also entail a greater analysis of each
patient's need for diagnostic testing, with the aim of reducing the total volume
of testing and the overall cost of medical care. The Company is unable to
predict whether, when or to what extent any new laws or regulations may be
enacted, or existing laws or regulations may be modified, any of which could
have a material adverse effect on the Company's revenues, operating margins and
profitability.
ENVIRONMENTAL MATTERS
With the exception of the nuclear imaging services performed by the Company, the
Company's operations do not entail the handling, storage, use, transport or
disposal of any hazardous substances or hazardous materials within the meaning
of any environmental laws. The Company is not aware of any asbestos abatement
activity required with respect to any of its facilities, or any underground
storage tanks on any of the properties on which the Company's facilities are
located.
The Company's nuclear imaging services require the handling of radioactive
materials, either in the form of FDA-approved single-dose prepackaged isotopes,
or small lots of bulk materials which the Company mixes with other
pharmaceuticals to prepare radiopharmaceuticals to facilitate imaging of various
body organs. These nuclear imaging operations are conducted in the States of
Illinois, Indiana, Ohio, Missouri, Kentucky, Texas, Louisiana and Oklahoma. The
"Agreement States" (Illinois, Texas, Kentucky and Louisiana) require a separate
license from the State to handle these radioactive materials. The Nuclear
Regulatory Commission controls the use of byproduct materials in the other
states (Indiana, Missouri, Oklahoma and Ohio) through the issuance of licenses.
The Company believes that it holds all necessary permits required by state and
federal law and that it is in compliance with all applicable laws and
regulations relating to the handling, storage, use, transport and disposal of
nuclear materials. Based on advice from its insurance carriers, the Company
believes that this limited handling of radioactive materials does not warrant
any special insurance.
The Company has not experienced any material environmental regulatory problems
in the past, and has not been subject to any fines, penalties or other
liabilities under any environmental laws or regulations. However, no assurance
can be given that future changes in such laws or regulations, or interpretations
thereof, or in the nature of the Company's operations, will not have a material
impact on the Company.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 computer and systems failures. Year 2000
failures due to processing errors potentially arising from calculations using
the Year 2000 date are a known risk. The Company is addressing this risk to the
availability and integrity of financial systems and the reliability of
operational systems, and has established processes for evaluating and managing
the risks and costs associated with this problem. The computing portfolio was
identified and an initial assessment has been completed. The cost of achieving
Year 2000 compliance is estimated to be approximately $40,000 over the cost of
normal upgrades and replacements, and will be incurred through fiscal 1999.
The Company believes that its financial reporting and billing systems are
substantially compliant with Year 2000 requirements. The Company has consulted
with its diagnostic equipment vendors and has been advised that certain items
will be supported at no cost, and that older items will be supported on a fee
basis. The cost of making the Company's diagnostic equipment Year 2000
compliant is estimated to
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be within a range of approximately $100,000 to $150,000 over the cost of normal
upgrades and replacements, and will be incurred through fiscal 1999.
Certain of the Company's customers and vendors may be dependent on computer or
other embedded information systems to conduct business transactions, although
the Company has not yet undertaken any investigation, other than its diagnostic
equipment vendors, to determine the nature or extent of any Year 2000 issues
that may be posed by customer or vendor unpreparedness. The Company expects to
discuss with its key customers and vendors the status of their Year 2000
readiness in the first and second quarters of 1999, and to promptly thereafter
identify possible alternative suppliers to the extent that such action may be
called for based on any relative lack of Year 2000 readiness by existing
suppliers. The Company does not expect the costs of this investigation to be
material.
EMPLOYEES
As of March 1, 1999, the Company had 385 full-time employees and 126 part-time
employees for a total of 511 employees. None of the Company's employees are
represented by any labor union or other collective bargaining unit. The Company
has not experienced any significant degree of employee turnover and the Company
believes that its relations with its employees are satisfactory.
RECENT DEVELOPMENTS
On February 18, 1999, the Company entered into an Agreement and Plan of Merger
with Medical Alliance, Inc. ("MAI"), a Nasdaq National Market company, pursuant
to which MAI is to merge with and into a wholly-owned subsidiary of DHS. Under
the terms of the agreement, holders of MAI common stock are to receive, upon
consummation of the transaction, 1.57 shares of DHS common stock for each
outstanding share of MAI common stock, and outstanding MAI stock options will be
converted into DHS stock options at that same exchange ratio. The transaction
is subject to approval by the stockholders of both companies, and certain other
conditions. Subject to obtaining such approvals and satisfying such conditions,
the transaction is expected to be completed by the end of the second quarter of
1999. However, there can be no assurance as to whether or when the transaction
with MAI will be consummated.
On February 19, 1999, the Company received notification from Nasdaq that, due to
the write-offs for asset impairment described in Item 7 below, there was some
question as to whether the Company continued to be in compliance with the
minimum tangible net worth required for continued listing of the Company's
common stock on the Nasdaq National Market; such notification also questioned
whether the Company had the required minimum number of round lot stockholders.
In its response, the Company has indicated that, although the write-offs will
result in a temporary inability to meet the required $4,000,000 tangible net
worth requirement, the transaction with MAI would, upon consummation,
immediately restore the Company to compliance; in addition, with respect to the
number of stockholders, the Company advised Nasdaq that, when taking into
account all beneficial holders holding DHS shares in "street" name, there are
substantially in excess of 400 round lot stockholders. The Company believes
that it has provided to Nasdaq a coherent and definitive plan for restoring the
Company's compliance with Nasdaq listing requirements, and the Company is
hopeful that Nasdaq will defer any further action regarding any delisting of the
Company's common stock pending the results of the proposed transaction with MAI
(although there can be no assurance as to whether or when Nasdaq will take any
further action).
ITEM 2. PROPERTIES
PROPERTY
The Company maintains its headquarters in approximately 13,119 square feet of
leased office space in Dallas, Texas. Base rental at that facility is $16.40
per square foot per year, and the lease expires in January 2004. The Company
also maintains divisional, satellite and other operating offices at 24 leased
locations, ranging in size from approximately 214 square feet to approximately
7,700 square feet, at rentals generally ranging from $4 to $32 per square foot
per year. The Company believes that its existing premises will be adequate for
its current operations for the foreseeable future. The Company does not own any
real property.
INVESTMENT POLICIES
The Company generally acquires its assets for the purpose of producing income
from the use of such assets in the Company's operations. The Company invests
excess cash on hand primarily in short-term certificates of deposit and United
States Treasury instruments.
The Company does not have any real estate-related investments and does not
intend to make or acquire any such investments in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to litigation arising in the normal course of its
business. No pending litigation involving the Company (taken singly or in the
aggregate) is expected to have a material adverse effect on the Company or its
consolidated financial position. The Company is not aware of any contemplated
legal proceedings that may be brought against the Company in the future and
which would, if adversely determined, have a material adverse effect on the
Company or its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth quarter of
1998.
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PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Since January 22, 1996, the Company's Common Stock has been listed on the NASDAQ
National Market. From June 23, 1993 to January 19, 1996, the Common Stock was
listed on the SmallCap Market of the National Association of Securities Dealers
Automated Quotation System. The range of reported high bid and low bid
quotations for the Common Stock on a quarterly basis from January 1, 1997
through December 31, 1998, is reflected in the table below. These quotations
reflect inter-dealer prices without adjustment for retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
High Bid Low Bid
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1998
<S> <C> <C>
1st Quarter $13.94 $10.06
2nd Quarter $12.50 $ 8.63
3rd Quarter $10.00 $ 3.75
4th Quarter $ 5.50 $ 1.97
1997
1st Quarter $10.13 $ 7.44
2nd Quarter $ 9.13 $ 7.25
3rd Quarter $15.13 $ 9.00
4th Quarter $14.75 $10.38
</TABLE>
On March 1, 1999, the last reported sale price for the Common Stock was $1.78,
and the Company had 218 stockholders of record as of that date. The Company
believes that there are more than 1300 beneficial owners of Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, in addition to options granted under the Company's
various stock option plans (see Item 10 below) and securities issued in
connection with the Company's business acquisitions (see the notes to the
audited financial statements included in Item 7 below), the Company consummated
a private placement in April 1996 of unregistered promissory notes in an
aggregate amount of $1,000,000 (the "Bridge Notes"), and in connection
therewith, issued, to the purchasers of such Bridge Notes, warrants (the "Bridge
Warrants") entitling the holders thereof to purchase, at any time through April
15, 2001, up to an aggregate of 50,000 shares of Common Stock of the Company at
an exercise price of $6.25 per share, subject to adjustment upon the occurrence
of any stock dividends, stock splits, combinations of shares or
reclassifications of the Common Stock, or upon any consolidation or merger of
the Company with or into another corporation. Commencing October 15, 1997, the
Company had the right to call the Bridge Warrants for redemption at $.01 per
Bridge Warrant on 30 days' written notice if the average market price of the
Common Stock equals or exceed $9.00 per share (subject to adjustments in respect
of the aforedescribed events) for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. All of the Bridge Notes were repaid in full out of the
net proceeds of the Company's secondary public offering in June 1996, and as of
the date of this report, an aggregate of 40,000 Bridge Warrants have been
exercised (leaving 10,000 Bridge Warrants outstanding). The issuance of the
Bridge Notes and the Bridge Warrants was exempt from registration under
Regulation D promulgated under the Securities Act of
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1933, as amended (the "Act"), based upon representations and warranties made by
the eighteen purchasers thereof as to their status as "accredited investors."
Simultaneously with the issuance of the Bridge Notes and the Bridge Warrants,
the Company borrowed an additional $1,000,000 from Chase Bank of Texas, N.A.,
formerly Texas Commerce Bank National Association ("Chase"), in conjunction with
which the Company issued to Chase warrants (the "Bank Warrants") entitling the
holders thereof to purchase up to 50,000 shares of Common Stock. The exercise
price, adjustment provisions, call provisions and other terms and conditions of
the Bank Warrants were identical to the terms and conditions of the Bridge
Warrants. The issuance of the Bank Warrants was exempt from registration
pursuant to Regulation D promulgated under the Act based upon Chase's
representations and warranties as to its status as an "accredited investor." All
of the Bank Warrants have been exercised.
In connection with the Company's acquisition of Advanced Clinical Technology,
Inc. and Horizon MDS Corporation (collectively, "ACT") in November 1996 (see
Note 13 to the audited financial statements included in Item 7 below), the
Company issued to ACT 642,857 shares of Series A Convertible Redeemable
Preferred Stock of the Company ("Series A Preferred Stock"), having an aggregate
liquidation preference of $4,500,000. The shares of Series A Preferred Stock
bear dividends at the rate of 7.25% per annum (payable in kind in additional
shares of Series A Preferred Stock), and all outstanding shares of Series A
Preferred Stock (including accrued dividends) are convertible, at the option of
the holder thereof, into Common Stock of the Company at the rate of one share of
Series A Preferred Stock for each share of Common Stock. In addition, in the
event that, commencing with the Company's fiscal quarter ended December 31,
1997, the mean average daily last reported sale price of the Common Stock (the
"Average Closing Price") in any fiscal quarter of the Company is less than $7.00
per share, then, at any time and from time to time during the next succeeding
fiscal quarter of the Company, each outstanding share of Series A Preferred
Stock will be convertible into a number of shares of Common Stock equal to $7.00
divided by the Average Closing Price during the preceding fiscal quarter. The
Company has reserved the right to limit ACT's holdings of conversion shares to
4.9% of the total outstanding common stock (or 9.9% in the event of and after
giving effect to any conversion at the reduced price under the immediately
preceding sentence). The issuance of the Series A Preferred Stock was exempt
from registration pursuant to Regulation D promulgated under the Act, and based
on ACT's warranty as to the acquisition of such shares for investment and not
for resale or distribution.
In connection with the Company's sale and issuance of $20,000,000 in principal
amount of subordinated notes to The Prudential Insurance Company of America
("Prudential") in April 1997, the Company also issued to Prudential five-year
redeemable common stock purchase warrants exercisable for up to 60,000 shares of
common stock of the Company at an exercise price of $12.25 per share. The
issuance of such subordinated notes and warrants was exempt from registration
under Regulation D promulgated under the Act, based upon Prudential's
representations and warranties as to its status as an "accredited investor." As
of December 31, 1998, none of such warrants had been exercised.
DIVIDEND POLICY
The Company has not previously paid any dividends on its common stock and for
the foreseeable future intends to continue its policy of retaining any earnings
to finance the development and expansion of its business. In addition, the
Company's loan agreement with Chase and the Company's subordinated debt
agreements with Prudential prohibit the payment of dividends without such
lenders' prior consent. In the future, the payment of dividends by the Company
on its Common Stock will also depend on the Company's financial condition,
results of operations and such other factors as the Board of Directors of the
Company may consider relevant.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following financial information for each of the five years ended December
31, 1998 has been derived from the Company's consolidated financial statements.
This information should be read in conjunction with the Consolidated Financial
Statements and related notes appearing at Item 8 below. All 1994 and 1995
information has been restated to reflect the pooling-of-interest with Advanced
Diagnostic Imaging, Inc. ("ADI").
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996 1995 1994
--------- -------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Gross revenues $ 44,844 $ 52,921 $24,171 $17,083 $11,508
Income (loss) from continuing
operations before cumulative effect
of change in accounting method (1) $(30,459) $ 5,761 $ 2,459 $ 1,403 $ 613
Net income (loss) $(41,292) $ 5,430 $ 2,459 $ 1,228 $ 613
Net income (loss) per share - basic $ (3.67) $ 0.57 $ 0.37 $ 0.25 $ 0.14
Net income (loss) per share diluted $ (3.67) $ 0.48 $ 0.29 $ 0.22 $ 0.13
Total assets $ 67,867 $107,854 $53,244 $19,292 $11,607
Long-term debt and lease obligations $ 37,843 $ 35,310 $ 7,082 $10,527 $ 1,164
Stockholders' equity $ 15,081 $ 49,953 $29,901 $ 8,906 $ 7,748
</TABLE>
__________________
(1) In 1998, the loss from continuing operations before cumulative effect of
change in accounting method includes operating expenses relating to a non-
recurring restructuring expense charge of approximately $6,597,000 and an
impairment charge on acquired assets of approximately $24,672,000.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information should be read in conjunction with the Consolidated Financial
Statements and related notes appearing at Item 8 below.
Results of Operations
In 1998, the Company's performance declined due to deterioration in the
ultrasound business it acquired from Advanced Clinical Technology, Inc. and
Horizon/MDS Corporation (collectively "ACT"), and to a lesser extent, the mobile
ultrasound business acquired from Diagnostic Imaging Services, Inc. ("DIS"). The
Company spent most of 1998 restructuring the acquired businesses, repricing or
resigning from unprofitable accounts, and adjusting its cost structure to
service the remaining business. As a result of the deterioration in the ACT and
DIS ultrasound businesses, the Company went through a period in which liquid
resources were depleted and the balance sheet became overleveraged. During 1998,
the Company wrote off $18.2 million in goodwill, $1.9 million in fixed assets,
and $2.4 million of acquired accounts receivable related primarily to these
acquisitions, as well as smaller additional write-offs related to other
acquisitions as described below. The Company has a high fixed-cost structure,
and as revenues from the acquired businesses declined, operating margins also
declined. Additionally, the margins related to portions of the replacement
revenues related to the business were too low. Many of the Company's
restructuring efforts during 1998 were directed towards reducing fixed costs,
eliminating marginal and unprofitable accounts, and establishing and improving
returns on new and existing business. Management began this process during the
second quarter of 1998 and substantially completed its restructuring efforts
during the fourth quarter. Although the net effect of these events in 1998 was
increased expenses on essentially flat revenues, management believes that its
efforts to restructure the business can result in a more stable and enduring
revenue stream with improved margins for 1999 and beyond.
In December 1998, the Company elected to change its method for accounting for
future payments relating to contract receivables due from long-term equipment
and service agreements. Under the previous method, expected profits or losses on
contracts were based on the contracts' guaranteed minimum values and total
estimated related contract costs upon installation. These estimates were
reviewed and revised periodically throughout the lives of the contracts, and
adjustments resulting from such revisions were recorded in the periods in which
the revisions were made. Losses on contracts were recorded in full as they were
identified. Accordingly, the Company's ability to accurately predict its
earnings was based in part on the timing, size, and estimated costs to be
incurred on new long-term contracts in any given period. As the Company's long-
term contracts increased in recent periods, both in length and dollar amount,
the impact of long-term contract revenue recognition became greater. Also,
because of uncertainties inherent in the estimation process as it relates to
long-term contracts, it was reasonably possible that actual earnings would
differ from the estimates. The Company changed its accounting method effective
January 1, 1998, in order to recognize revenue and expense on long-term
contracts ratably over the lives of the contracts. Although this change will
result in lower revenues and earnings (due to the deferral aspect of the new
method), the change will have no impact on cash flows. Management believes that
this change will make the Company's revenues, expenses and earnings more
predictable.
11
<PAGE>
The following table sets forth pro forma operating results of the Company,
presented as if the change in accounting method had been in place for the years
ended 1997 and 1996, and to exclude nonrecurring charges. The discussion that
follows is based on a comparison of 1998 results of opertions as compared to the
pro forma presentation of the operating results for 1997 and 1996.
<TABLE>
<CAPTION>
Pro forma
Year Ended December 31,
------------------------------------------
(Unaudited)
(In thousands, except per share data)
1998 1997 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Gross revenues $44,844 $43,897 $21,275
------- ------- -------
Expenses:
General & administrative 3,279 2,232 1,385
Salaries & employee benefits 25,880 23,658 11,899
Legal & professional 397 344 178
Rent & utilities 1,410 1,192 390
Taxes & insurance 1,208 1,104 420
Technical operating expenses 5,948 5,994 3,158
Provision for doubtful accounts 1,913 890 41
Depreciation & amortization 7,040 5,843 2,797
------- ------- -------
Total operating expenses 47,076 41,258 20,268
------- ------- -------
Income (loss) from continuing operations
======= ======= =======
before income taxes $(2,232) $ 2,640 $ 1,007
======= ======= =======
Income (loss) from continuing operations
before income taxes per share: ======= ======= =======
Basic
$(0.20) $0.28 $0.15
======= ======= =======
Diluted $(0.20) $0.24 $0.12
======= ======= =======
</TABLE>
NOTE: Numbers may not add due to rounding.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Gross revenues increased by 2.16% to approximately $44,844,000 in 1998 from
approximately $43,897,000 in 1997. Excluding revenues attributable to acquired
businesses, gross revenues, decreased by 13.2% to approximately $38,094,000 for
1998 from approximately $43,897,000 for 1997. This decline in revenues was
primarily due to a loss of significant revenue contracts, which related to
acquisitions made prior to 1997, and is one of the factors associated with the
impairment of acquired assets.
The Company's operating expenses increased approximately 14.1% from
approximately $41,258,000 in 1997 to approximately $47,076,000 in 1998. This
increase in ongoing operating expenses was, in part, related to the heightened
commitment the Company made in the last quarter of 1997 to its sales and
marketing efforts. These efforts resulted in an increase in sales personnel and
an increase in general and administrative expenses associated with additional
travel expenses, as well as increased advertising expenses. The Company also
experienced increases in legal and professional fees, rents, utilities, property
taxes, insurance, depreciation and amortization as a result of additional
expenses associated with the expansion of operations through prior
acquisitions. The provision for doubtful accounts also increased significantly
in 1998, due to the Company's reevaluation of the overall collectibility of its
outstanding accounts receivable.
In addition to recurring operating expenses, the Company incurred a non-
recurring restructuring expense charge of approximately $6,597,000 and an
impairment charge on acquired assets of approximately $24,672,000. The
restructuring charge relates to expenses for a reduction in staff and the
resulting severance payments and benefits amounting to approximately $1,198,000,
divisional office closings amounting to approximately $1,839,000, and other
expenses amounting to approximately $3,560,000.
12
<PAGE>
The Company experienced an impairment charge on assets due to cash flow losses
by the acquired businesses, the loss of significant acquired revenue contracts,
and the doubtful realization of certain assets. The impaired assets consisted of
goodwill, non-compete agreements, accounts receivable and property and equipment
in connection with the acquisitions of ACT, Valley Diagnostic Services, Heart
Diagnostic Institutes Inc., Medmark Associates, Inc., Cardiac Concepts, Inc.,
DIS' ultrasound division, Mobil Diagnostics, Inc., and Sonomed, Inc. The amount
relating to the goodwill impairment was approximately $18,239,000. Impairment of
non-compete agreements amounted to approximately $213,000. Impairment of
acquired receivables due to uncollectibility amounted to approximately
$2,449,000. Impairment of property and equipment amounted to approximately
$3,771,000, arising from a significant decrease in the market value of the
property and equipment.
Income from continuing operations before income taxes decreased by 184.5% to an
approximate loss of $2,232,000 in 1998 from an approximate income of $2,640,000
in 1997. This decrease is due primarily to the increase in ongoing operating
expenses and deterioration of the acquired businesses as explained above.
Interest expense increased by 7.1% from approximately $4,056,000 in 1997 to
approximately $4,342,000 in 1998, primarily as a result of new debt obligations
assumed in connection with business acquisitions.
"Other income" is primarily interest earned on liquid investments in 1998 and
1997.
The Company changed its accounting method effective January 1, 1998, in order to
recognize revenue and expense on long-term contracts ratably over the lives of
the contracts. The cumulative effect of the change in accounting method at
December 31, 1998 was approximately $16,144,000 less tax benefit of
approximately $5,311,000.
Results for 1997 reflect a net loss (net of income taxes) of approximately
$327,000, arising from the dispositions of the Company's therapist placement
division and Mexican subsidiary.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Gross revenues increased by 106.3% to approximately $43,897,000 in 1997 from
approximately $21,275,000 in 1996. Excluding revenues attributable to acquired
businesses, gross revenues decreased by 11.4% to approximately $18,853,000 for
1997 from approximately $21,275,000 for 1996. This decline in revenues was
primarily due to a loss of significant revenue contracts, which related to
acquisitions made during 1996, and is one of the factors associated with the
impairment of acquired assets, as explained above.
The Company's operating expenses increased from approximately $20,268,000 in
1996 to approximately $41,258,000 in 1997. As a percentage of gross revenues,
operating expenses decreased from 95.3% to 94.0%. The decrease was due to
increased efficiencies realized through consolidation of various overhead and
administrative functions, and absorption of fixed costs over an increased
revenue base.
Income from continuing operations before income taxes increased by 162.0% to
approximately $2,640,000 in 1997 from approximately $1,007,000 in 1996. This
increase is primarily due to the DIS MRI division and other business
acquisitions, and continued consolidation of the Company's administrative
functions.
Interest expense increased by 366.5% from approximately $870,000 in 1996 to
approximately $4,056,000 in 1997, primarily as a result of the $20,000,000 in
subordinated debt obligations incurred in connection with the Company's 1997
acquisitions from DIS, and new debt obligations assumed in connection with
those and other business acquisitions. As a percentage of gross revenues,
interest expense increased from 3.6% in 1996 to 7.7% in 1997.
"Other income" is primarily interest earned on liquid investments in 1997 and
1996.
Results for 1997 reflect a net loss (net of income taxes) of approximately
$327,000, arising from the dispositions of the Company's therapist placement
division and Mexican subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
In May 1998, the Company and its subsidiaries entered in to an amendment of the
revolving credit and term loan facility with their senior lender, Chase Bank of
Texas, N.A. ("Chase"), providing for up to $2,500,000 in available revolving
credit (or, if less, 75% of the Company's and its subsidiaries' eligible
accounts receivable from time to time), and an acquisition term loan facility of
up to $17,500,000 in maximum principal amount. Pursuant to the amendment, the
Company rolled over the outstanding borrowings of $2,500,000 on the revolving
credit facility into the term loan facility. At December 31, 1998, the Company
had no outstanding borrowings under the revolving credit facility and $7,952,930
in principal amount of outstanding borrowings under the term loan facility.
These loans bear interest at varying rates, depending on the Company's relative
leverage from time to time.
In June 1998, the Company and its subsidiaries entered into a further amendment
of the revolving credit and term loan facility with Chase, whereby the revolving
credit facility was extended. In connection with the amendment, Chase waived
certain prior financial covenant defaults.
13
<PAGE>
Effective as of December 31, 1998, the Company and its subsidiaries entered in
to an amendment of the revolving credit and term loan facility with Chase. This
amendment provides for the implementation of a new financial covenant structure.
The Company has also entered in to an amendment of its subordinated loan
agreement with Prudential, containing amendments consistent with the Chase
amendment.
The new financial covenant structure temporarily suspend the Fixed Charge
Coverage Ratio, Funded Debt to EBITDA Ratio, and Senior Debt to EBITDA Ratio,
and requires the Company to maintain minimum EBITDA levels. In addition, the
new structure limits unleveraged capital expenditures, and prohibits the Company
from incurring additional debt or selling assets.
Under the new amendment, the outstanding balance of the Company's term facility
begins a five-year amortization program to commence July 15, 1999, and the
remaining availability under that facility is cancelled. The revolving facility
was reduced to $1 million subject to certain advance restrictions with a
shortened maturity of January 31, 1999 (which was thereafter extended to June
30, 1999).
In April 1997, the Company issued and sold to Prudential $20,000,000 in
principal amount of senior subordinated promissory notes (the "Subordinated
Notes"). The Subordinated Notes bear interest at a fixed rate of 10.5% per
annum, and mature as to principal in equal one-third installments on April 17 of
each of 2003, 2004 and 2005. The Subordinated Notes may be prepaid by the
Company under certain circumstances (including the requirement of certain "make-
whole" prepayment premiums), and the Company may be required (at the option of
the holders of the Subordinated Notes) to purchase the Subordinated Notes in the
event of a change in control of the Company. The Subordinated Notes also
require the Company and its subsidiaries to comply with certain financial
covenants, including limitations on certain other indebtedness.
The Company's continuation as a going concern is dependent on its ability to
comply with the revised terms of its financing agreements, to obtain additional
financing or refinancing as may be required, and to increase cash flow from
operations. The Company's financial statements do not include any adjustments
relating to the recoverability of assets and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company and its subsidiaries have also entered into various financing
arrangements with commercial leasing companies and equipment suppliers, bearing
interest ranging from 7.7% to 12.1% per annum.
In 1997, the Company received net proceeds of approximately $8,423,993 from the
exercise of its previously outstanding publicly traded warrants (which were
called for redemption in the first quarter of 1997), $562,500 from the exercise
of other warrants, and $1,492,801 from the exercise of options under the
Company's various stock option plans.
In 1998, the Company received net proceeds of approximately, $1,801,858 from the
exercise of warrants, and $811,136 from the exercise of options under the
Company's various stock option plans.
Based on the Company's operating plan management believes that available
resources and funds generated from operations will be sufficient to meet the
Company's operating requirements through the close of the Company's fiscal year
ending December 31, 1999.
14
<PAGE>
TRENDS AND UNCERTAINTIES
The Company's future revenues and results of operations may be substantially
affected by proposed reforms of the nation's healthcare system and by potential
reductions in reimbursement rates and policies imposed by Medicare and other
third-party reimbursement programs (from which the Company derives a material
portion of its receipts). Continuing pressures on pricing structures applicable
to the Company's services, or inability to renew existing contracts, could have
the effect of reducing the Company's revenues and operating profit margins. The
Company is unable to predict the nature or extent of any such changes and/or the
effects thereof on the Company.
Forward-Looking Statements
Certain statements contained in this Form 10-K, including, without limitation,
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or achievements of the
Company or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the regions in which the
Company operates; industry capacity; demographic changes; existing governmental
regulations; legislative proposals for health care reform; changes in Medicare
and Medicaid payment levels; liability and other claims asserted against the
Company; competition; the loss of any significant ability to attract and retain
qualified personnel; the availability and terms of capital to fund additional
acquisitions. Given these uncertainties, prospective investors are cautioned
not to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
results of any revision to any of the forward-looking statements contained
herein to reflect future events or developments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report F - 2
Consolidated Balance Sheet as
of December 31, 1998 and 1997 F - 3
Consolidated Statement of Operations
for the years ended
December 31, 1998, 1997 and 1996 F - 5
Consolidated Statement of
Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 F - 7
Consolidated Statement of Cash Flows
for the years ended December 31, 1998 and 1997 F - 8
Notes to the Consolidated Financial Statements F - 10
</TABLE>
16
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
AND
INDEPENDENT AUDITORS' REPORT
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
February 19, 1999
The Board of Directors
Diagnostic Health Services, Inc.
We have audited the accompanying consolidated balance sheets of Diagnostic
Health Services, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for the years ended December 31, 1998, 1997
and 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Diagnostic Health
Services, Inc. and Subsidiaries at December 31, 1998 and 1997, and the results
of their operations and cash flows for the years ended December 31, 1998, 1997
and 1996 in conformity with generally accepted accounting principles.
/S/ Simonton, Kutac & Barnidge, L.L.P.
Simonton, Kutac & Barnidge, L.L.P.
Houston, Texas
F-2
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,087,349 $ 5,126,114
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $1,428,636 and $612,437, respectively 10,088,540 17,294,128
Accrued interest and other 96,176 793,369
Contracts receivable - current -- 2,167,265
Prepaid expenses 352,917 1,528,931
Income tax refund receivable 973,492 --
Deferred tax asset 1,115,200 87,876
------------ ------------
Total Current Assets 13,713,674 26,997,683
------------ ------------
Investment in unconsolidated affiliate 1,933,477 --
Property & Equipment:
Office furniture & equipment 2,381,019 2,015,749
Machinery & service equipment 31,888,460 35,286,844
Leasehold improvements 2,071,914 273,968
Less: accumulated depreciation and amortization (12,131,560) (8,876,887)
------------ ------------
Total Property & Equipment 24,209,833 28,699,674
------------ ------------
Other Assets:
Deposits and other 911,901 2,999,701
Deferred acquisition costs 98,852 122,536
Contracts receivable - long-term -- 10,058,674
Deferred tax asset 8,352,567 --
Goodwill 19,043,582 38,793,903
Noncompete agreements 2,698,533 3,428,270
Less: accumulated amortization (3,095,764) (3,246,266)
------------ ------------
Total Other Assets 28,009,671 52,156,818
------------ ------------
Total Assets $ 67,866,655 $107,854,175
============ ============
</TABLE>
The following notes are an integral part of these financial statements.
F-3
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
--------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 3,503,268 $ 2,626,978
Accrued liabilities 2,221,795 3,774,969
Current lease obligations 2,585,334 4,663,279
Current portion of long-term debt 814,106 1,485,113
Notes payable -- 2,362,554
Accrued acquisition cost -- 1,500,000
Deferred expenses 1,955,000 --
Current income taxes -- 1,363,543
------------ ------------
Total Current Liabilities 11,079,503 17,776,436
Long-term lease obligations 10,652,605 10,348,496
Long-term debt 27,190,030 24,961,570
Deferred rent -- 149,253
Other liabilities 3,863,244 2,647,277
Deferred income taxes -- 2,018,480
------------ ------------
Total Liabilities 52,785,382 57,901,512
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, $.001 par value; authorized 15,000,000
shares; issued 11,713,895 shares in 1998 and
10,718,867 shares in 1997; outstanding 11,480,636
shares in 1998 and 10,485,608 shares in 1997 11,714 10,719
Preferred stock, $.001 par value; authorized 3,000,000
shares; issued and outstanding 746,500 shares in
1998 and 695,593 shares in 1997 747 696
Additional paid-in capital 48,571,630 42,151,656
Retained earnings (accumulated deficit) (33,291,667) 8,000,743
Accumulated other comprehensive income -- --
Stockholder receivable (103,500) (103,500)
Treasury stock at cost; 233,259 common shares (107,651) (107,651)
------------ ------------
Total Stockholders' Equity 15,081,273 49,952,663
------------ ------------
Total Liabilities and Stockholders' Equity $ 67,866,655 $107,854,175
============ ============
</TABLE>
The following notes are an integral part of these financial statements.
F-4
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------
AND COMPREHENSIVE INCOME
------------------------
<TABLE>
<CAPTION>
For the Years Ended
December 31
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Gross revenues $ 44,844,442 $52,920,804 24,171,286
------------ ----------- -----------
Expenses:
General & administrative 3,279,109 2,232,032 1,385,305
Salaries & employee benefits 25,880,078 23,658,464 11,898,905
Legal & professional 397,245 344,029 177,756
Rent & utilities 1,410,190 1,192,449 389,533
Taxes & insurance 1,208,398 1,103,643 420,375
Technical operating expenses 5,947,721 5,994,195 3,158,037
Provision for doubtful accounts 1,913,004 890,161 40,970
Depreciation and amortization 7,040,277 5,842,678 2,796,865
Restructure expense 6,596,683 -- --
Impairment of acquired assets 24,672,291 -- --
------------ ----------- -----------
Total operating expenses 78,344,996 41,257,651 20,267,746
------------ ----------- -----------
Income (loss) from operations (33,500,554) 11,663,153 3,903,540
------------ ----------- -----------
Other income (expense):
Other income 83,778 369,403 486,704
Interest expense (4,341,991) (4,056,301) (869,601)
------------ ----------- -----------
Total other income (expense) (4,258,213) (3,686,898) (382,897)
------------ ----------- -----------
Income (loss) from continuing operations
before provision for income taxes, equity
of net earnings of affiliate, discontinued
operations and cumulative effect of
change in accounting method (37,758,767) 7,976,255 3,520,643
Provision for income tax expense (benefit) (6,972,618) 2,215,726 1,061,560
------------ ----------- -----------
Income (loss) from continuing operations
before equity of net earnings of affiliate,
discontinued operations and cumulative
effect of change in accounting method (30,786,149) 5,760,529 2,459,083
Equity of net earnings of affiliate 326,946 -- --
------------ ----------- -----------
Income (loss) before discontinued operations
and cumulative effect of change
in accounting method $(30,459,203) $ 5,760,529 $ 2,459,083
------------ ----------- -----------
</TABLE>
The following notes are an integral part of these financial statements.
F-5
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
AND COMPREHENSIVE INCOME (CONTINUED)
------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
December 31
---------------------------------------
1998 1997 1996
------------- ------------ ----------
<S> <C> <C> <C>
Income (loss) before discontinued operations
and cumulative effect of change
in accounting method $(30,459,203) $ 5,760,529 $2,459,083
Loss from discontinued operations,
net of income tax benefit of $160,952 -- (326,934) --
------------ ----------- ----------
Income (loss) before cumulative effect
of change in accounting method (30,459,203) 5,433,595 2,459,083
Cumulative effect of change in
accounting method 10,833,156 -- --
------------ ----------- ----------
Net income (loss) $(41,292,359) $ 5,433,595 $2,459,083
------------ ----------- ----------
Other comprehensive income (loss), net of
tax:
Foreign currency translation adjustment -- (3,894) (179)
------------ ----------- ----------
Comprehensive income (loss) $(41,292,359) $ 5,429,701 $2,458,904
============ =========== ==========
Net income (loss) per share:
Basic $ (3.67) $ 0.57 0.37
============ =========== ==========
Diluted $ (3.73) $ 0.48 0.29
============ =========== ==========
Weighted average common
shares outstanding:
Basic 11,236,737 9,527,736 6,709,795
============ =========== ==========
Diluted 11,063,197 11,221,358 8,446,335
============ =========== ==========
</TABLE>
The following notes are an integral part of these financial statements.
F-6
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Retained
Additional Earnings Foreign Stock
Common Preferred Paid-In (Accumulated Currency Subscription Stockholder Treasury
Stock Stock Capital Deficit) Translation Receivable Receivable Stock
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 5,206 $ -- $ 9,018,442 $ 108,118 $(6,171) $(8,250) $(103,500) $(107,651)
Shares issued in connection
with secondary offering 2,955 17,494,019
Common shares issued in
connection with acquisitions 209 917,459
Preferred shares issued in
connection with acquisitions 643
Stock options exercised 1 1,468
MDI warrants exercised 3 9,231
Foreign currency translations 271
Stock subscription collection 8,250
Shares issued in payment of debt 27 176,806
Preferred stock dividend 6 (6)
Net income 2,459,083
-----------------------------------------------------------------------------------------------
Balance, December 31, 1996 8,401 649 27,617,425 2,567,195 (5,900) -- (103,500) (107,651)
Common shares issued in
connection with acquisitions 350 3,548,946
Stock options exercised 399 1,382,403
Warrants exercised 1,569 9,602,882 5,900
Disposition of Mexico Operations
Preferred stock dividend 47 (47)
Net income 5,433,595
-----------------------------------------------------------------------------------------------
Balance, December 31, 1997 10,719 696 42,151,656 8,000,743 -- -- (103,500) (107,651)
Common shares issued in
connection with acquisitions 191 2,190,554
Stock options exercised 269 810,867
Warrants exercised 278 1,801,580
Shares issued in payment of debt 200 1,499,800
Shares issued in settlement 57 117,173
Preferred stock dividend 51 (51) -
Net income (41,292,359)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1998 $11,714 $ 747 $48,571,630 $(33,291,667) $ -- $ -- $(103,500) $(107,651)
===============================================================================================
<CAPTION>
Total
------------
<S> <C>
Balance, December 31, 1995 $ 8,906,194
Shares issued in connection
with secondary offering 17,496,974
Common shares issued in
connection with acquisitions 917,668
Preferred shares issued in
connection with acquisitions 643
Stock options exercised 1,469
MDI warrants exercised 9,234
Foreign currency translations 271
Stock subscription collection 8,250
Shares issued in payment of debt 176,833
Preferred stock dividend --
Net income 2,459,083
------------
Balance, December 31, 1996 29,976,619
Common shares issued in
connection with acquisitions 3,549,296
Stock options exercised 1,382,802
Warrants exercised 9,604,451
Disposition of Mexico Operations 5,900
Preferred stock dividend --
Net income 5,433,595
------------
Balance, December 31, 1997 49,952,663
Common shares issued in
connection with acquisitions 2,190,745
Stock options exercised 811,136
Warrants exercised 1,801,858
Shares issued in payment of debt 1,500,000
Shares issued in settlement 117,230
Preferred stock dividend --
Net income (41,292,359)
------------
Balance, December 31, 1998 $ 15,081,273
============
</TABLE>
The following notes are an integral part of these financial statements.
F-7
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------------
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operations:
Net income (loss) $(41,292,359) $ 5,433,595 2,459,083
Adjustments to Reconcile Net Income to
Net Cash (Used in) Provided by Operations:
Restructure and impairment expense 24,904,969 -- --
Effect of change in accounting method 16,413,873 -- --
Equity earnings in unconsolidated affiliate (326,946) -- --
Non-cash stock based compensation 117,230 -- --
Loss on disposal of assets 36,009 -- --
Depreciation and amortization 7,047,277 5,842,678 2,796,865
Deferred federal income taxes (11,398,371) 930,701 848,965
Deferred rent expense (149,253) (6,172) 155,426
Foreign currency translation -- 5,900 271
Provision for doubtful accounts 1,913,004 890,161 --
Net chargeoffs for bad debt (1,980,632) (2,488,470) --
Decrease (increase) in trade receivable 3,021,696 (4,792,489) (4,331,129)
Decrease (increase) in other receivable 714,977 -- --
Increase in contracts receivable -- (9,169,206) (1,164,244)
Decrease (increase) in prepaid expenses 605,312 (93,686) (701,492)
Decrease (increase) in other assets 1,986,535 (1,279,409) (590,986)
Increase in accounts payable 835,775 336,490 14,404
Increase (decrease) in accrued liabilities 12,412 716,231 655,716
Increase (decrease) in income taxes payable (2,337,035) 1,168,543 171,035
Increase in other liabilities -- 1,786,249 279,411
------------ ------------ -----------
Net Cash (Used in)
Provided by Operations 124,473 (718,884) 593,325
------------ ------------ -----------
Cash Flows from Investing Activities:
Purchase of investment securities -- -- (5,000,000)
Sale of investment securities -- 5,000,000 --
Cash payments for property purchases (2,197,209) (3,550,845) (1,487,178)
Acquisition of businesses, net of cash acquired (11,350) (15,962,847) (13,003,736)
Decrease in subsidiary acquisition costs (97,187) (1,389,671) (449,829)
Increase (decrease) in other receivables (139,470) 91,691 (524,384)
Increase (decrease) in employee receivables 125,804 49,473 (87,587)
Increase in stockholder receivable (4,118) (6,750) (6,210)
------------ ------------ -----------
Net Cash Used in Investing Activities (2,323,530) (15,768,949) (20,558,924)
------------ ------------ -----------
</TABLE>
The following notes are an integral part of these financial statements
F-8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
------------------------------------------------
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
-----------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------------------------
1998 1997 1996
----------------- ------------- -----------
<S> <C> <C> <C>
Cash Flows from Financing Activities:
Proceeds from issuance of common stock 2,612,994 10,987,254 17,751,177
Net borrowings on line of credit 137,446 790,554 872,000
Proceeds from issuance of loans -- 7,980,000 8,569,573
Proceeds from senior subordinated loan -- 20,000,000 --
Proceeds from stock subscription receivable -- 8,250
Deferred finance charge -- (800,000) --
Principal payments on long-term debt (1,156,654) (13,902,001) (6,315,642)
Principal payments on capital
lease obligations (3,433,494) (3,671,407) (1,395,391)
----------- ------------ ----------
Net Cash Provided by
Financing Activities (1,839,708) 21,384,400 19,489,967
----------- ------------ ----------
Net increase (decrease) in cash
and cash equivalents (4,038,765) 4,896,567 (475,632)
Cash and cash equivalents, beginning of year 5,126,114 229,547 705,179
----------- ------------ ----------
Cash and cash equivalents, end of year $ 1,087,349 $ 5,126,114 229,547
=========== ============ ==========
</TABLE>
The following notes are an integral part of these financial statements
F-9
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC, & SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - ORGANIZATION
Organization - Diagnostic Health Services, Inc. ("DHS") and its subsidiaries
(collectively, with DHS, the "Company") is an outsource provider of medical
services to hospitals, physicians' offices and other healthcare facilities in
the Midwest, South Central and Western United States. Headquartered in Dallas,
Texas, DHS primarily provides radiology and cardiology diagnostics services and
equipment, and related management services to a broad range of healthcare
providers.
Acquisitions are discussed in Note 11 of these Notes to Financial Statements.
The following chart sets forth the corporate structure of the Company and its
100% owned subsidiaries at December 31, 1998:
[CHART APPEARS HERE]
In addition to the above, DHS and DHSMS have two inactive wholly-owned
subsidiaries, Diagnostic Health Services de Mexico, S.A. de C.V. and HomeCare
International, Inc.
Principles of Consolidation - The consolidated financial statements include the
accounts of Diagnostic Health Services, Inc. and its subsidiaries. All
intercompany accounts and transactions have been eliminated in the consolidated
financial statements. Investment in unconsolidated affiliate is accounted for
on the equity method. The equity in earnings of the unconsolidated affiliate is
reported in the consolidated statement of income.
F-10
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - Revenues are recognized when services are performed and
are recorded at published charges, net of discounts and contractual allowances.
Revenues received under the Medicare program are subject to audit and possible
adjustment by third party reimbursement agencies.
Cash Equivalents - For purposes of the statement of cash flows, the Company
considers any short-term cash investment with a maturity of three months or less
to be a cash equivalent.
Prepaid Expenses - Prepaid expenses represent advance payments made or
liabilities incurred on various contracts and agreements with initial terms of
one year or less. The carrying amount of prepaid expenses is determined by
comparing the remaining period of the agreement to its initial cost.
Investment Securities - Investment securities consist of commercial paper with a
maturity of 180 days. All of the Company's investments are carried at cost and
classified as held-to-maturity securities. No realized gains or losses were
recognized during the years ended December 31, 1998, 1997 and 1996 since all
securities were held to maturity.
Contracts Receivable - In December 1998, the Company elected to change its
method for accounting for future payments relating to contract receivables due
on long-term equipment and service agreements. Under the previous method,
expected profits or losses on contracts were based on the Company's estimates of
total revenue values and related costs upon installation. These estimates were
reviewed and revised periodically throughout the lives of the contracts, and
adjustments resulting from such revisions were recorded in the periods in which
the revisions were made. Losses on contracts were recorded in full as they were
identified. The Company changed its accounting method effective January 1, 1998,
in order to recognize revenue and expense on long-term contracts ratably over
the lives of the contracts.
Property, Equipment and Leasehold Improvements - Property and equipment are
stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the related assets, ranging from 3 to 10 years.
Depreciation expense amounted to $4,422,115 and $3,535,037 for the years ended
December 31, 1998 and 1997, respectively.
Deposits and Other Assets - Deposits and other assets include deferred finance
costs associated with the senior subordinated indebtedness, which is amortized
over the life of the indebtedness.
F-11
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill - The excess of the aggregate purchase price over the fair market value
of net assets of businesses acquired is included in the accompanying balance
sheet as goodwill, and is amortized over a twenty-year period using the
straight-line method. The Company periodically evaluates whether changes have
occurred that would require revision of the remaining estimated useful life of
the assigned goodwill or impair the recoverability of the carrying value of the
goodwill. If such circumstances arise, the Company records an impairment loss
as the difference between the estimate of the related after-tax income
contribution, on a discounted basis, and the carrying value of the goodwill.
Any impairment loss would be reported as a component of income from continuing
operations before tax.
Noncompete Agreements - Noncompete agreements are amortized over the life of the
agreements, which range from two to five years.
Long-Lived Assets - In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
the Company records impairment losses on long-lived assets used in operations,
including goodwill and intangible assets, when events and circumstances indicate
that the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amounts of those assets.
Income Taxes - The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes," which requires the use of the "liability
method" of accounting for income taxes. Deferred taxes are provided using the
liability method whereby deferred tax assets are recognized for deductible
temporary differences and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. The Company files consolidated income tax
returns.
Earnings (Loss) Per Share - Basic earnings (loss) per share has been computed by
dividing net income by the weighted-average number of shares outstanding during
the period. Diluted earnings per share has been computed by dividing net income
by the weighted average number of shares plus common stock equivalents
outstanding during the period, computed using the treasury stock method,
excluding anti-dilutive securities.
F-12
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments - The carrying value of cash, cash
equivalents, receivables and accounts payable approximates fair value due to the
short maturity of these instruments. The carrying value of short and long-term
debt approximates fair value based on discounting the projected cash flows using
market rates available for similar maturities. None of the financial
instruments are held for trading purposes.
Use of Estimates and Assumptions - Management uses estimates and assumptions in
preparing its financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported amounts of revenues and expenses. Actual
results may vary from the estimates that were used.
Stock-Based Compensation - In October 1995, SFAS No. 123, "Accounting for Stock-
based Compensation" was issued. This statement requires the fair value of stock
options and other stock-based compensation issued to employees, to either be
included as compensation expense in the income statement or the pro forma effect
on net income and earnings per share of such compensation expense to be
disclosed in the footnotes to the Company's financial statements, commencing
with the Company's 1996 fiscal year. The Company adopted SFAS 123 on January 1,
1996. The Company will continue to measure compensation costs using the
"intrinsic value based method" of accounting for stock issued to employees.
New Accounting Standards In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income." This statement, which is
effective for fiscal years beginning after December 15, 1997, establishes
standards for reporting and displaying comprehensive income and its components
in the financial statements. Under this statement, the Company is required to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings in the stockholders' equity section of the
balance sheet.
NOTE 3 - INVESTMENT IN UNCONSOLIDATED AFFILIATE
On February 26, 1998, SoCal acquired from Diagnostic Imaging Services, Inc., a
Delaware corporation ("DIS-Delaware"), one-half of the outstanding general
partnership interests and one-half of the outstanding limited partnership
interests in Scripps Chula Vista Imaging Center, L.P. ("SCVIC"), whose business
consists of the operations of a magnetic resonance imaging center on the campus
of Scripps Hospital in Chula Vista, California. The consideration paid for such
partnership interests consisted of 127,250 shares of DHS common stock valued at
$1,606,531.
F-13
<PAGE>
NOTE 4 - NOTES PAYABLE
- -----------------------
At December 31, 1998 and 1997, notes payable consisted of the following
obligations:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
$1,000,000 and $2,500,000 line of credit
with bank at December 31, 1998 and 1997,
respectively, with interest at varying rates
(9.0 % at December 31, 1997),
due June 30, 1999. Secured by
substantially all of the assets of
the Company. $ -- $2,362,554
---------- ----------
$ -- $2,362,554
========== ==========
</TABLE>
In July 1996, the Company entered a two-year loan agreement with a bank whereby
the Company was permitted to borrow up to $2,500,000 under a revolving credit
note. This revolving note replaced the existing credit facility in place at
that time. The loan agreement (as amended) also provided for a separate term
loan facility totaling $17,500,000 in original principal amount, whose terms are
discussed in Note 5. In December 1998, the Company restructured the
aforementioned loan agreement by consolidating the outstanding revolving line
balance into a new term note agreement whose terms are discussed in Note 5.
Effective as of December 31, 1998, the Company and its subsidiaries entered in
to an amendment of the revolving credit and term loan facility with Chase. This
commitment provides for permanent waiver of all defaults outstanding through and
including November 30, 1998, and implementation of a new covenant structure.
Under the new amendment, the outstanding balance of the Company's term facility
begins a five-year amortization program to commence July 15, 1999, and the
remaining availability under that facility is cancelled. The revolving facility
was reduced to $2 million with a shortened maturity of January 31, 1999. The
new financial covenant structure temporarily suspend the Fixed Charge Coverage
Ratio, Funded Debt to EBITDA Ratio, and Senior Debt to EBITDA Ratio, and
requires the Company to maintain minimum EBITDA levels. In addition, the new
structure limits unleveraged capital expenditures, and prohibits the Company
from incurring additional debt or selling assets.
The Company's previous revolving credit and existing term note agreements
contain certain restrictive covenants which, among other things, (1) require the
maintenance of a minimum current ratio, (2) provide for a maximum funded debt
ratio (as defined in the loan agreement), (3) require the maintenance of a
minimum fixed charge coverage ratio (as defined in the loan agreement), and (4)
place certain restrictions on the Company's ability to declare or pay dividends,
make certain loans, advances or investments, or incur, create or assume
additional debt or other obligations.
F-14
<PAGE>
NOTE 5 - LONG-TERM DEBT
- -----------------------
Long-term debt at year-end consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Restructured note payable to bank, maturing June 30,
2001, due in quarterly installments of $400,000, plus
interest due quarterly at varying rates (9.5% at
December 31, 1998); secured by substantially all of
the assets of the Company. $ 7,952,930 $ --
Note payable to bank in connection with acquisitions
representing outstanding portion of $17,500,000 credit
facility, maturing June 1998, due in monthly installments
of $142,826, plus interest at varying rates (9.0% at
December 31, 1997); secured by substantially all of
the assets of the Company. -- 6,121,094
Senior subordinated promissory notes payable in
connection with DIS acquisitions, maturing April 17,
2005, interest at 10.50% due in quarterly installments
and principal of $6,666,667 due on April 17, 2003,
2004, and 2005; unsecured. 20,000,000 20,000,000
Notes payable to financial institutions, maturing through
2000, due in monthly installments of $2,440 including
principal and interest from 7.0% to 10.0%; secured by
vehicles. -- 31,200
Note payable to corporation, maturing May 15, 2001,
due in monthly installments of $1,825 including principal
and interest at 7.25%; secured by equipment. 51,208 66,132
Noncompete agreements, maturing through 1998, due
in monthly payments of $17,083 and $27,628
respectively, including principal and interest of
6% to 9%, unsecured. -- 228,257
------------ -----------
28,004,138 26,446,683
Less current maturities (814,107) (1,485,113)
------------ -----------
$ 27,190,031 $24,961,570
============ ===========
</TABLE>
<PAGE>
NOTE 5 - LONG-TERM DEBT (CONTINUED)
- ----------------------------------
Scheduled maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
For the Years Ending
December 31,
- ----------------------------
<S> <C>
1999 $ 814,107
2000 1,611,242
2001 1,602,324
2002 1,590,586
2003 1,590,586
Thereafter 20,795,293
-----------
$28,004,138
===========
</TABLE>
NOTE 6 - LEASES
- ---------------
The Company, as lessee, has entered into and/or assumed various non-cancelable
leases for machinery, service equipment, vehicles, and office facilities. The
following assets, subject to capital leases, are included in the balance sheet
under the corresponding asset categories at December 31:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Office furniture & equipment $ 12,652 $ 56,783
Machinery & service equipment 14,614,874 20,089,761
----------- -----------
14,627,526 20,146,544
Less: accumulated amortization (3,116,795) (2,687,782)
----------- -----------
$11,510,731 $17,458,762
=========== ===========
</TABLE>
Depreciation expense includes the amortization of assets acquired through
capital leases.
The Company leased its office space under operating lease agreements that
include a deferred rental period. In accordance with generally accepted
accounting principles, rent expense was computed by the straight-line
amortization of the total lease payments. As of December 31, 1998, there are no
deferred rental expenses.
F-16
<PAGE>
NOTE 6 LEASES (Continued)
- -------------------------
Future minimum lease payments under non-cancelable leases at December 31, 1998
are as follows:
<TABLE>
<CAPTION>
For the Years Ending Capital Operating
December 31, Leases Leases
- ------------------------------------------- ------------ ----------
<S> <C> <C>
1999 $ 3,690,566 $1,189,329
2000 3,561,302 996,546
2001 3,242,950 756,472
2002 2,385,665 596,277
2003 2,385,665 372,373
Thereafter 1,210,371 227,152
----------- ----------
Total minimum lease payments 16,476,519 $4,138,149
==========
Less: amount representing interest (3,238,580)
-----------
Present value of minimum lease payments 13,237,939
Less: current portion (2,585,334)
-----------
Long-term capital lease obligation $10,652,605
===========
</TABLE>
Rent expense during the years ended December 31, 1998, 1997 and 1996 for all
operating leases was $1,255,144, $1,084,054 and $758,351, respectively, and is
included in operating expenses.
As of December 31, 1998, the Company is guarantor of a capitalized lease for
certain equipment owned by Scripps Chula Vista Imaging Center, L.P., in which
the Company is a partner with fifty-percent ownership. The net present value of
the lease on the financial statements of the partnership at December 31, 1998
amounted to $807,040 with future minimum lease payments as follows:
<TABLE>
<CAPTION>
Guaranteed
For the Years Ending Capital
December 31, Leases
- ------------------------------------------- -----------
<S> <C>
1999 $ 190,332
2000 190,332
2001 190,332
2002 190,332
2003 190,332
Thereafter 80,704
----------
Total minimum lease payments 1,032,364
Less: amount representing interest (225,324)
----------
Present value of minimum lease payments $ 807,040
==========
</TABLE>
F-17
<PAGE>
NOTE 7 PREFERRED STOCK
- -----------------------
The preferred stockholders are entitled to receive preferential and cumulative
annual preferred stock dividends at a rate of 7.25% of liquidation preference
value of $4,500,000, and are entitled to a preference, in liquidation, in the
amount of $7.00 per share plus accrued and unpaid dividends. As of December 31,
1998, there were no cumulative preferred stock dividends in arrears. Preferred
shares are not entitled to vote except in certain circumstances. The holders of
outstanding preferred shares may convert outstanding shares at the rate of one
share for each share of common stock. Additionally, in any fiscal quarter in
which the mean average daily last reported sale price of the common stock is
less than $7.00 per share, then, at any time during the next succeeding fiscal
quarter of the Company, the holders of the preferred stock shall have the right
to convert any or all of their shares into common stock, with each outstanding
share being convertible into a number of shares of common stock equal to the
liquidation value divided by the average closing price during the preceding
fiscal quarter. Conversion has an aggregate limitation of 9.9% of the
outstanding common shares outstanding prior to conversion.
Additionally, the Company may at its sole discretion redeem all or any portion
of the preferred stock then outstanding. On any such redemption, the Company
will pay a price per share on a progressive scale specifically designated by the
certificate of stock designation agreement. At December 31, 1998, the Company
would pay a price of no less than $8.10 per preferred share for any such
redemption. Any such redemption would be subject to the consent of the
Company's lenders.
NOTE 8 - INCOME TAXES
- ----------------------
Net deferred tax assets and liabilities at December 31, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 485,736 $ 85,229
Goodwill 6,036,353 --
NOL Carryforward 9,753,654 --
Noncompete agreements 325,475 171,761
Accrued vacation -- 2,647
----------- -----------
Total deferred tax assets before valuation allowance 16,601,218 259,637
Less: valuation allowance (4,241,219) --
----------- -----------
Total deferred tax asset $12,359,999 $ 259,637
=========== ===========
Deferred tax liabilities:
Property and equipment (2,892,232) (2,013,838)
Goodwill -- (176,403)
----------- -----------
Total deferred tax liabilities (2,892,232) (2,190,241)
----------- -----------
Net deferred tax asset (liability) $ 9,467,767 $(1,930,604)
=========== ===========
</TABLE>
F-18
<PAGE>
NOTE 8 - INCOME TAXES (CONTINUED)
- ---------------------------------
The Company has net operating loss carryforwards amounting to approximately
$28,700,000 which expire in the year 2013.
The consolidated provision for income taxes included in the statement of
operations for the years ended December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Current taxes (receivable) payable $ (973,492) $1,363,543 $ 195,000
Deferred taxes (receivable) payable:
Long term (benefit) (4,971,802) 882,183 869,413
Current (benefit) (1,027,324) (30,000) (2,853)
----------- ---------- ----------
Provision for income taxes $(6,972,618) $2,215,726 $1,061,560
=========== ========== ==========
</TABLE>
The difference between the federal statutory tax rate and the effective tax rate
on continuing operations for the years ended December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal Statutory Rate (35)% 35% 35%
Property and equipment 1 5 --
Tax effect of loss on discontinued operations -- (2) --
Intangible assets (14) (1) 2
Net tax loss carryovers 22 -- --
Utilization of tax loss carryforwards -- -- (12)
Tax effect of change in accounting method 12 -- --
Allowance for doubtful accounts (1) (9) --
Valuation allowance 9 -- --
Other, net (8) 1 5
-------- ------- --------
Effective tax rate (14)% 29% 30%
======== ======= ========
</TABLE>
F-19
<PAGE>
NOTE 9 - OTHER COMPREHENSIVE INCOME
- ------------------------------------
The following is a summary of other comprehensive income:
<TABLE>
<CAPTION>
For the year ended December 31, 1996
---------------------------------------
Before Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
----------- ------------- -----------
<S> <C> <C> <C>
Foreign currency translation adjustments $ (271) $ 92 $ (179)
----------- ------------ -----------
Total impact on other comprehensive income $ (271) $ 92 $ (179)
=========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
----------------------------------------------
Before Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
------------- ------------ ---------------
<S> <C> <C> <C>
Foreign currency translation adjustments $(1,757) 597 (1,160)
Reclassification adjustment, net of tax, for
previously recognized foreign currency
translation adjustments (4,143) 1,409 (2,734)
-------------- ------------- --------------
Total impact on other comprehensive income $(5,900) $2,006 $(3,894)
============== ============= ==============
</TABLE>
There are no other components of comprehensive income as of December 31, 1998.
F-20
<PAGE>
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
Cash paid for the years ended December 31, 1998, 1997 and 1996 for interest was
approximately $4,209,686, $3,520,340 and $921,512, respectively. Cash paid for
Federal income taxes for the years ended December 31, 1998, 1997 and 1996
amounted to $935,024, $23,022 and $0, respectively.
The Company acquired assets in exchange for the issuance of common stock and the
assumption of various liabilities in connection with certain acquisitions. Cash
and noncash investing and financing activities related to acquisitions consisted
of the following for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------- ------------
<S> <C> <C> <C>
Assets acquired $ 958,594 $ 30,628,401 $19,904,468
Liabilities assumed (330,823) (11,000,061) (6,032,525)
Common stock issued (584,214) (3,351,000) (851,643)
--------- ------------ -----------
Total cash paid 43,557 16,277,340 13,020,300
Less cash acquired (32,207) (314,493) (16,564)
--------- ------------ -----------
Net cash paid $ 11,350 $ 15,962,847 $13,003,736
========= ============ ===========
</TABLE>
Property and equipment acquired under capital leases for the years ended
December 31, 1998 and 1997 amounted to $1,567,293 and $14,642,967, respectively.
The Company issued 26,215 shares of common stock valued at $48,296 in 1997
pursuant to contingent stock issuance agreements relating to various
acquisitions.
The Company issued 56,553 shares of common stock valued at $117,230 in 1998
pursuant to an employee severance agreement.
In February 1998, the Company and DIS agreed to convert $1,500,000 deferred
liabilities owed to DIS in respect of the acquisition of the MRI centers into
200,000 shares of common stock (see Note 12); therefore, the deferred
liabilities recorded as current liabilities at December 31, 1997 were converted
to equity during the year ended December 31, 1998.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
The Company is involved in certain lawsuits arising in the ordinary course of
business. In the opinion of the Company's legal counsel and management, any
liability resulting from such litigation would not be material in relation to
the Company's financial position.
F-21
<PAGE>
NOTE 12 - ACQUISITIONS
- ----------------------
In January 1997, the Company, through its Heart Institute of Tulsa, Inc.
subsidiary ("HIT"), acquired Ultrasound Diagnostic Services, Ltd. ("UDS"), an
Arizona-based provider of non-invasive diagnostic ultrasound testing services.
The consideration paid for UDS consisted of 86,520 shares of DHS's common stock
and a $400,000 cash payment to the former stockholders of UDS.
On April 17, 1997 (effective March 1, 1997), SoCal acquired all of the issued
and outstanding capital stock of DIS (which, together with its wholly-owned
subsidiaries, Diagnostic Imaging Services, Inc. I and Santa Monica Imaging
Center Limited Partnership, are collectively referred to herein as the "DIS
Companies"), whose business consists primarily of the ownership and operation of
four (4) hospital-based magnetic resonance imaging (MRI) centers located in
southern California. The purchase price for the stock of DIS was $9,083,865
(subject to post-closing adjustment), of which $7,583,865 was paid in cash, and
the remaining $1,500,000 of which is payable either in cash or (at the seller's
option) in common stock of the Company (valued at $7.615 per share) in three
equal annual installments of $500,000 each on April 17 of each of 1998, 1999 and
2000. In addition, the DIS Companies were acquired subject to capital lease
obligations, financing agreements and other commitments in respect of fixed
assets of the business in the aggregate principal amount of $6,046,755.
The funds utilized to pay the cash portion of the purchase price in the second
DIS transaction were obtained through the simultaneous issuance and sale by the
Company to The Prudential Insurance Company of America ("Prudential") of
$20,000,000 in principal amount of senior subordinated promissory notes of the
Company (the "Notes"). The Notes bear interest at a fixed rate of 10.5% per
annum (payable quarterly), and mature as to principal in equal one-third
installments on April 17 of each of 2003, 2004 and 2005. The Notes may be
prepaid at the Company's option (subject to certain "make-whole" prepayment
premiums in respect of the remaining stated term of the Notes), and the Company
may be required (at the Noteholders' option) to purchase the Notes in the event
of a change in control of the Company. In addition to application to the
payment of the cash portion of the purchase price for the stock of DIS, the net
proceeds from the issuance and sale of the Notes were utilized to repay
$5,500,000 in borrowings obtained under the Company's senior credit facilities
with Texas Commerce Bank National Association (the "Bank") (utilized in
connection with the Company's March 1997 acquisition of the ultrasound business
of DIS), and for short-term investments pending other use of such net proceeds.
F-22
<PAGE>
NOTE 12 - ACQUISITIONS (CONTINUED)
- ----------------------------------
In connection with the issuance of the Notes, the Company paid Prudential a fee
in the amount of $54,590, and issued to Prudential a five-year redeemable common
stock purchase warrant (with piggyback registration rights) for 60,000 shares of
common stock of the Company at an exercise price of $12.25 per share. In
addition, the Company paid to Prudential Securities, Inc. (as placement agent) a
fee in the amount of $690,470.
Effect as of October 17, 1997, HIT acquired CardioVision, Inc. ("CVI"), a Las
Vegas, Nevada-based provider of non-invasive diagnostic ultrasound testing
services. The consideration paid for CVI consisted of 29,728 shares of DHS
common stock and a $340,000 cash payment to the former stockholders of CVI.
On November 19, 1997, SoCal acquired the assets and business of Valley
Diagnostic Services ("Valley"); a proprietorship providing mobile diagnostic
ultrasound testing services in southern California. The consideration paid by
SoCal in this transaction consisted of 13,309 shares of DHS common stock and a
$100,000 cash payment to the former owner of Valley.
Effective as of December 2, 1997, HIT acquired Medical Diagnostic Imaging, Inc.
("MDII"), a Huntsville, Alabama-based provider of non-invasive diagnostic
ultrasound testing services. The consideration for MDII consisted of 100,524
shares of DHS common stock and a $900,000 cash payment to the former
stockholders of MDII.
Effective as of December 9, 1997, SoCal acquired Mobil Diagnostics, Inc.
("Mobil"), a southern California-based provider of mobile non-invasive
diagnostic ultrasound testing services. The consideration for Mobil consisted
of 39,720 shares of DHS common stock and a cash payment of $150,000 to the
former stockholder of Mobil. In addition, SoCal agreed to cause DHS to issue
certain additional shares of DHS common stock to the former stockholder within
15 days after the first anniversary of the closing date, and to make cash
payments to the former stockholder of $50,000 and $28,000, respectively, within
15 days after the first and second anniversaries of the closing date.
Effective as of December 30, 1997, the Company's second-tier wholly-owned
subsidiary Mobile Diagnostic Systems, Inc. ("MDS") acquired Medical Ancillary
Services, Inc. ("MASI"), a Fort Worth-based provider of non-invasive diagnostic
ultrasound and nuclear imaging testing services. The consideration paid for
MASI consisted of 53,582 shares of DHS common stock and a cash payment of
$384,000 to the former stockholders of MASI.
F-23
<PAGE>
NOTE 12 - ACQUISITIONS (CONTINUED)
- ----------------------------------
Effective as of January 30, 1998, MDS acquired International Cardiac Monitoring,
Inc. ("ICM"), a Houston-based provider of medical testing and monitoring
services. The consideration paid for ICM consisted of 26,946 shares of DHS
common stock.
On February 26, 1998, SoCal acquired from Diagnostic Imaging Services, Inc., a
Delaware corporation ("DIS-Delaware"), one-half of the outstanding general
partnership interests and one-half of the outstanding limited partnership
interests in Scripps Chula Vista Imaging Center, L.P. ("SCVIC"), whose business
consists of the operations of a magnetic resonance imaging center on the campus
of Scripps Hospital in Chula Vista, California. The consideration paid for such
partnership interests consisted of 127,250 shares of DHS common stock valued at
$1,606,531, which DHS committed to include in its next registration statement
filed with the Securities Exchange Commission (other than a registration
statement in respect of any acquisition, merger or consolidation relating to DHS
or any employee benefit plan of DHS.) In conjunction with the acquisition, DIS-
Delaware agreed to convert $1,500,000 deferred liabilities owed in accordance
with the acquisition of the MRI centers to 200,000 shares of common stock;
therefore, the deferred liabilities were recorded as current liabilities at
December 31, 1997.
Effective as of March 2, 1998, the Company acquired Sonomed, Inc. ("Sonomed"), a
Birmingham, Alabama-based provider of medical testing and monitoring services.
The consideration paid for Sonomed consisted of 14,571 shares of DHS common
stock and a cash payment of $30,000 to the former stockholder of Sonomed.
On May 11, 1998, HIT acquired Diagnostic Radiology Mobile Ultrasound, Inc.
("DRMU"), an Edmond, Oklahoma-based provider of non-invasive diagnostic
ultrasound testing services. The consideration paid to the former owners of
DRMU consisted of 13,484 shares of DHS common stock.
On May 22, 1998, MDS purchased the assets of the ultrasound business segment of
Advanced Respiratory Care Services, Inc. ("ARCS"), which provides non-invasive
diagnostic ultrasound testing services in Abilene, Texas and Nashville,
Tennessee. The consideration paid to ARCS consisted of a cash payment of
$13,556.
NOTE 13 - RELATED PARTY TRANSACTIONS
- ------------------------------------
A stockholder of the Company is a principal in a firm that provides financial
consulting services to the Company. Fees paid to the firm in 1998, 1997 and
1996 were $58,562, $49,652 and $63,740, respectively.
The accounts receivable from stockholders consist of $13,543 of other advances
made to three of the Company's stockholders as of December 31, 1998 and 1997,
and $37,778 and $33,660, respectively, of accrued interest on the stockholder
receivables.
F-24
<PAGE>
NOTE 14 - STOCK OPTION PLANS
- ----------------------------
On April 15, 1992, DHS adopted a stock option plan (the "1992 Plan") that
authorizes the granting of options to officers, directors and selected key
employees and/or consultants to acquire shares of DHS common stock. The
aggregate number of shares with respect to which qualified incentive options may
be granted shall not exceed 180,702 shares, with the exercise price being not
less than the fair market value at the date of grant. The aggregate number of
shares with respect to which non-qualified options may be granted shall not
exceed 722,807 shares. The exercise price for the non-qualified options shall
not be less than 85% of the fair market value at the date of grant. As of
December 31, 1998, substantially all of the available options under the 1992
Plan have been granted at exercise prices ranging from $0.9375 to $8.625 per
common share, and approximately 94% of such awarded options contain optional
price reduction provisions in connection with any change in control of the
Company. Stock options outstanding under the 1992 Plan amounted to 526,601,
639,308, and 793,585 as of the years ended December 31, 1998, 1997 and 1996,
respectively.
In April 1995, in response to the substantial increase in the size of the
Company and its labor force, the Board of Directors of the Company adopted and
approved the Company's 1995 Non-Qualified Stock Option Plan (the "1995 Non-
Qualified Plan"), pursuant to which officers, directors, and/or key employees
and/or consultants of the Company can receive non-qualified stock options to
purchase up to an aggregate of 500,000 shares of the Company's common stock.
The exercise price, expiration date and other terms of any options granted under
the 1995 Non-Qualified Plan are substantially similar to the requirements
applicable to non-qualified options under the 1992 Plan. Through December 31,
1998, the Company's Board of Directors had awarded all of the available options
under the 1995 Non-Qualified Plan at exercise prices ranging from $1.9375 to
$10.25 per common share. Stock options outstanding under the 1995 Non-Qualified
Plan amounted to 253,000, 350,200, and 454,625 as of the years ended December
31, 1998, 1997 and 1996, respectively. At December 31, 1998, approximately 75%
of such awarded options contain optional price reduction provisions in
connection with any change in control of the Company.
In November 1995, the stockholders of DHS approved the Company's 1995 Incentive
Stock Option Plan (the "1995 Incentive Plan") as previously adopted by DHS'
Board of Directors. A total of 500,000 incentive stock options may be issued
from time to time to key employees of the Company under the 1995 Incentive Plan,
on terms and conditions (including an exercise price not less than fair market
value on the date of grant) satisfying the requirements of the Internal Revenue
Code with respect to incentive stock options. Through December 31, 1998, the
Company's Board of Directors had awarded 316,939 options under the 1995
Incentive Plan at exercise prices ranging from $6.25 to $10.6875 per common
share. Stock options outstanding under the 1995 Incentive Plan amounted to
237,589, 159,789 and 127,250 as of the years ended December 31, 1998, 1997 and
1996, respectively.
F-25
<PAGE>
NOTE 14 - STOCK OPTION PLANS (CONTINUED)
- ---------------------------------------
In January 1997, the Board of Directors of the Company adopted and approved the
Company's 1997 Non-Qualified Stock Option Plan (the "1997 Non-Qualified Plan"),
pursuant to which officers, directors, and/or key employees and/or consultants
of the Company can receive non-qualified stock options to purchase up to an
aggregate of 1,000,000 shares of the Company's common stock. The exercise
price, expiration date and other terms of any options granted under the 1997
Non-Qualified Plan are substantially similar to the requirements applicable to
non-qualified options under the 1992 Plan. Through December 31, 1998, the
Company's Board of Directors had awarded, under the 1997 Non-Qualified Plan,
stock options for an aggregate of 848,761 common shares at exercise prices
ranging from $7.4375 to $10.6875 per common share. Stock options outstanding
under the 1997 Non-Qualified Plan amounted to 763,861 and 657,161 as of the
December 31, 1998 and 1997, respectively. At December 31, 1998, approximately
one-third of such awarded options contains optional price reduction provisions
in connection with any change in control of the Company.
A summary of the status of stock options is set forth below:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1998 December 31, 1997
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Stock Options Shares Price Shares Price
- ------------- ------ -------- ----------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 1,806,458 $7.53 1,375,460 $3.81
Granted 270,900 $8.64 897,890 $8.88
Exercised (219,457) $3.67 (399,452) $4.67
Forfeited/expired (76,850) $6.27 (67,440) $5.70
---------- ----------
Outstanding, end of period 1,781,051 $6.10 1,806,458 $7.53
========== ==========
Options exercisable, end of period 1,532,151 $5.69 1,806,458 $7.53
========== ==========
Weighted average fair value of
options granted during the year $ 8.64 $ 8.88
========== ==========
</TABLE>
F-26
<PAGE>
NOTE 14 - STOCK OPTION PLANS (CONTINUED)
- ---------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------------
Weighted Average
Range of Exercise Options Remaining Weighted Average Options Exercisable at Weighted Average
Prices Outstanding at Contractual Life Exercise Price 12/31/98 Exercise Price
12/31/98
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.9375 to $3.00 598,601 1.7 $ 1.90 598,601 $ 1.90
$3.01 to $5.50 121,000 4.9 $ 4.31 121,000 $ 4.31
$5.51 to $7.50 306,350 4.9 $ 7.24 306,350 $ 7.24
$7.51 to $10.00 472,600 5.2 $ 8.39 223,700 $ 8.14
$10.01 to $13.00 282,500 5.6 $10.68 282,500 $10.68
--------- ---------
1,781,051 4.0 $ 6.10 1,532,151 $ 5.69
========= =========
</TABLE>
Vesting varies by agreement ranging from zero to three years. Compensation
costs will be recognized as an expense over the periods of employment
attributable to the options at an amount equal to the excess of the fair market
value of the stock at the date of measurement over the amount the employee must
pay. The measurement date is generally the grant date. As of December 31, 1998,
1997 and 1996, no compensation cost was recognized as expense. Had compensation
cost for the Company's stock-based compensation been determined on the fair
value at the grant dates for awards with the method of FASB Statement 123, the
Company's net income (loss) would have been $(42,430,991), $4,545,538, and
$2,410,489 for the years ended December 31, 1998, 1997 and 1996, respectively.
Accordingly, basic and diluted loss per share would have amounted to $(3.78) per
share and $(3.84) per share, respectively, as of December 31, 1998. Basic and
diluted earnings per share would have amounted to $0.48 per share and $0.47 per
share, respectively, as of December 31, 1997. Basic and diluted earnings per
share would have amounted to $0.36 per share and $0.31 per share, respectively,
as of December 31, 1996.
Using the fair value method, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 1998: dividend yield
of 0.0 percent; expected volatility of 81.94 percent; risk-free interest rates
of 5.5 percent; expected lives of three years. Using the fair value method, the
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 0.0 percent; expected
volatility of 5.55 percent; risk-free interest rates of 5.0 percent; expected
lives of two years. Using the fair value method, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants in 1996:
dividend yield of 0.0 percent; expected volatility of 10.0 percent; risk-free
interest rates of 4.56 percent; expected lives of one year.
F-27
<PAGE>
NOTE 15 - WARRANTS
- ------------------
On October 31, 1997, the Company filed an S-8 registration statement with the
Securities and Exchange Commission registering an aggregate of 2,867,509 shares
underlying the Company's stock option plans, for which options covering
1,789,660 shares were then outstanding. Executive officers and directors, who
collectively hold approximately 71% of the outstanding options and option
shares, agreed to certain restrictions on the resale of their option shares
during the one-year period following the effective date of the registration.
On February 14, 1997, the SEC declared effective the Company's Form S-3
Registration Statement relating to an offering of 1,791,150 Warrant Shares,
which are issuable upon exercise, at prices ranging from $5.48 to $7.50 per
share, of (i) 1,375,000 Redeemable Common Stock Purchase Warrants (the "Public
Warrants") issued in connection with the company's 1993 initial public offering
(the "IPO"), (ii) 316,150 underwriter warrants issued in connection with the IPO
(the "Underwriters' Warrants"), and (iii) 100,000 warrants issued in connection
with DHS's equity private placement in April 1996 (the "Bridge Warrants") of
which 2,500 had been exercised prior to the effectiveness of the registration.
On February 18, 1997, the Company called all of the Public Warrants for
redemption.
On April 17, 1997, the Company issued 60,000 common stock purchase warrants to
Prudential Insurance Company of America in connection with the sale of
$20,000,000 in principal amount of senior subordinated promissory notes. As of
December 31, 1998, no warrants under this agreement had been exercised.
At December 31, 1997, stock warrants outstanding amounted to 386,150, at
exercise prices ranging from $5.48 to $12.25 per common share. At December 31,
1998, stock warrants outstanding amounted to 70,000, at exercise prices ranging
from $6.25 to $12.25 per common share.
F-28
<PAGE>
NOTE 16 - EARNINGS PER SHARE
- ----------------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
For the year ended December 31, 1998
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- ----------
<S> <C> <C> <C>
Loss before extraordinary item $(41,292,359)
Less: preferred stock dividends (51)
------------
BASIC EARNINGS PER SHARE
Loss available to common stockholders $(41,292,410) 11,236,737 $(3.67)
======
EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock 51 --
Stock warrants -- (34,126)
Employee stock options -- (139,414)
------------ ----------
DILUTED EARNINGS PER SHARE
Loss available to common stockholders
plus assumed conversions $(41,292,359) 11,063,197 $(3.73)
============ ========== ======
</TABLE>
As of December 31, 1998, warrants to purchase 10,000 shares of common stock at
$6.25 per share and options to purchase 1,025,951 at prices ranging from $0.9375
to $7.4375 were outstanding but were not included in the computation of diluted
earnings per share because the options had an anti-dilutive effect on earnings
per share. Additionally, preferred shares convertible into 1,136,583 shares of
common stock were not included in the computation of diluted earnings per share
because the options had an anti-dilutive effect on earnings per share.
<TABLE>
<CAPTION>
For the year ended December 31, 1997
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
<S> <C> <C> <C>
Income before extraordinary item $5,433,595
Less: preferred stock dividend (47)
----------
BASIC EARNINGS PER SHARE
Income available to common stockholders $5,433,548 9,527,736 $0.57
=====
EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock 47 695,593
Stock warrants -- 156,993
Employee stock options -- 841,036
---------- ----------
Diluted earnings per share
Income available to common stockholders
plus assumed conversions $5,433,595 11,221,358 $0.48
========== ========== =====
</TABLE>
F-29
<PAGE>
NOTE 16 - EARNINGS PER SHARE (CONTINUED)
- ---------------------------------------
As of December 31, 1997, warrants to purchase 60,000 shares of common stock at
$12.25 per share were outstanding but were not included in the computation of
diluted earnings per share because the options had an anti-dilutive effect on
earnings per share.
<TABLE>
<CAPTION>
For the year ended December 31, 1996
--------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
<S> <C> <C> <C>
Income before extraordinary item $2,459,083
Less: preferred stock dividends (6)
----------
BASIC EARNINGS PER SHARE
Income available to common stockholders $2,459,077 6,709,795 $0.37
=====
EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock 6 648,986
Stock warrants -- 126,463
Contingent stock options -- 58,935
Employee stock options -- 902,156
---------- ---------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
plus assumed conversions $2,459,083 8,446,335 $0.29
========== ========= =====
</TABLE>
As of December 31, 1996, options to purchase 5,000 shares of common stock at
$7.50 per share were outstanding but were not included in the computation of
diluted earnings per share because the options had an anti-dilutive effect on
earnings per share.
NOTE 17 - EMPLOYEE BENEFIT PLAN
- -------------------------------
Effective March 31, 1997, the Company adopted a profit sharing savings plan for
all eligible employees. The plan provides for savings contributions by
employees of 1 to 15% of the their compensation, subject to limitations of the
Employee Retirement Income Security Act. The Company may, at its discretion,
make a matching contribution and/or discretionary contribution to the plan, both
of which shall be determined by the Board of Directors. Such contributions are
expenses and funded currently. The Company made no discretionary contributions
during the year ended December 31, 1998 and 1997.
F-30
<PAGE>
NOTE 18 - DISCONTINUED OPERATIONS
- ---------------------------------
In December 1997, the Company's Board of Directors adopted a plan to discontinue
the operations of HomeCare International de Mexico S.A. de C.V. ("HomeCare").
On December 30, 1997, the Company sold all of the outstanding stock of HomeCare
and terminated all operations within Mexico. Accordingly, the loss of $392,674,
net of tax benefit, from the disposal of a business segment has been segregated
from continuing operations and reported as separate line item on the statement
of operations. The net operating activity of HomeCare after the measurement
date through date of disposal on December 30, 1997 was not significant.
In November 1997, the Company's Board of Directors adopted a plan to discontinue
the operations of providing temporary placement with allied healthcare
professionals throughout the U.S. and Mexico. Effective as of December 1, 1997,
the Company sold certain assets associated with this business segment.
Accordingly, the gain of $65,738, net of tax expense, from the disposal of a
business segment has been segregated from continuing operations and reported as
separate line item on the statement of operations. The net operating activity
of this segment after the measurement date through date of disposal on December
1, 1997 was not significant.
NOTE 19 - YEAR 2000 EDP ISSUE
- -----------------------------
The Company believes that its financial reporting and billing systems are
substantially compliant with Year 2000 requirements. The Company has consulted
with its diagnostic equipment vendors and has been advised that certain items
will be supported at no cost, and that older items will be supported on a fee
basis. The cost of making the Company's diagnostic equipment Year 2000
compliant is estimated within a range of approximately $100,000 to $150,000 over
the cost of normal upgrades and replacements, and will be incurred through
fiscal 1999.
NOTE 20 - IMPAIRMENT OF ACQUIRED ASSETS
- ---------------------------------------
For the year ended December 31, 1998, the Company recorded an impairment loss on
certain assets received in connection with several acquisitions. The Company
experienced an impairment loss on assets due to a current period cash flow loss
by the acquired entities, loss of significant acquired revenue contracts and
projected future cash flow losses on the assets. The impairment loss was
measured as the amount at which the carrying value of the asset exceeds the fair
value of the asset. The fair value of the asset was determined using the
estimated undiscounted future cash flows of the assets.
F-31
<PAGE>
NOTE 20 - IMPAIRMENT OF ACQUIRED ASSETS (CONTINUED)
- --------------------------------------------------
The impaired assets consisted of goodwill, non-compete agreements, accounts
receivable and property & equipment in connection with the acquisitions of
Advanced Clinical Technology Inc., Valley Diagnostic Services, Heart Diagnostic
Institutes Inc., Medmark Associates, Inc., Cardiac Concepts, Inc., DIS'
ultrasound division, Mobil Diagnostics, Inc., and Sonomed, Inc.
The amount of the impairment loss included in loss from continuing operations
related to goodwill impairment amounted to $18,239,325 for the year ended
December 31, 1998. Impairment of non-compete agreements included in loss from
continuing operations for the year ended December 31, 1998 amounted to $212,763.
Impairment of acquired receivables due to uncollectibility included in loss from
continuing operations for the year ended December 31, 1998 amounted to
$2,448,946. Impairment of property and equipment included in loss from
continuing operations for the year ended December 31, 1998 amounted to
$3,771,257. A significant decrease in the market value of the property and
equipment created the impairment. Total impairment loss recognized for the year
ended December 31, 1998 amounted to $24,672,291.
NOTE 21 - RESTRUCTURE EXPENSE
- -----------------------------
The Company restructured certain of its operations and recorded a restructuring
charge of approximately $6,596,683. The restructuring charge relates to
expenses for a reduction in staff and the resulting severance payments amounting
to approximately $1,197,512, divisional office closings amounting to
approximately $1,839,175, and other expenses amounting to $3,559,996. After the
related income tax benefit of approximately $2,243,000, this charge reduced
fiscal year 1998 earnings by approximately $4,353,683.
F-32
<PAGE>
NOTE 22 - CHANGE IN ACCOUNTING METHOD
- -------------------------------------
In December 1998, the Company elected to change its method for accounting for
future payments relating to contract receivables due on long-term equipment and
service agreements. Under the previous method, expected profits or losses on
contracts were based on the Company's estimates of total revenue values and
related costs upon installation. These estimates were reviewed and revised
periodically throughout the lives of the contracts, and adjustments resulting
from such revisions were recorded in the periods in which the revisions were
made. Losses on contracts were recorded in full as they were identified.
The Company changed its accounting method effective January 1, 1998, in order to
recognize revenue and expense on long-term contracts ratably over the life of
the contracts. The cumulative effect of the change in accounting method at
December 31, 1998 is $16,143,873 less tax benefit of $5,310,717.
The pro-forma effect of the change in accounting method relating to net income
follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
------------ --------
<S> <C> <C>
Income (loss) before discontinued operations $ (691,224) $412,208
Loss from discontinued operations (326,934) --
----------- --------
Net income (loss) $(1,018,158) $412,208
=========== ========
Net income (loss) per common share:
Basic $ (0.11) $ 0.06
=========== ========
Diluted $ (0.11) $ 0.05
=========== ========
</TABLE>
F-33
<PAGE>
NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------
Unaudited quarterly financial data for the year ended December 31, 1998 follows:
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------------------
(In thousands, except per share data)
----------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $10,720 $11,415 $11,697 $ 11,012
------- ------- ------- --------
Gross profit (loss) $ (660) $(5,852) $ 398 $(27,285)
------- ------- ------- --------
Income (loss) from continuing
operations before cumulative effect
of change in accounting method $(1,535) $(6,879) $ (711) $(28,306)
------- ------- ------- --------
Net income (loss) $(1,535) $(6,879) $(1,038) $(31,839)
======= ======= ======= ========
Income (loss) from continuing
operations per common share:
Basic $ (0.14) $ (0.61) $ (0.06) $ (2.52)
======= ======= ======= ========
Diluted $ (0.14) $ (0.61) $ (0.06) $ (2.52)
======= ======= ======= ========
Net income (loss) per common share:
Basic $ (0.14) $ (0.61) $ (0.09) $ (2.83)
======= ======= ======= ========
Diluted $ (0.14) $ (0.61) $ (0.09) $ (2.83)
======= ======= ======= ========
</TABLE>
Unaudited quarterly financial data for the year ended December 31, 1997 follows:
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------------------------------
(In thousands, except per share data)
---------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 10,510 $ 12,533 $ 14,890 $ 14,988
------------ ------------ ------------ ------------
Gross profit $ 1,864 $ 2,927 $ 3,349 $ 3,523
------------ ------------ ------------ ------------
Income (loss) from continuing
operations before cumulative effect
of change in accounting method $ 1,546 $ 2,064 $ 2,283 $ 1,756
------------ ------------ ------------ ------------
Net income (loss) $ 1,021 $ 1,362 $ 1,505 $ 1,546
============ ============ ============ ============
Income (loss) from continuing
operations per common share:
Basic $ 0.16 $ 0.21 $ 0.23 $ 0.17
============ ============ ============ ============
Diluted $ 0.15 $ 0.17 $ 0.19 $ 0.15
============ ============ ============ ============
Net income (loss) per common share:
Basic $ 0.10 $ 0.14 $ 0.15 $ 0.15
============ ============ ============ ============
Diluted $ 0.10 $ 0.12 $ 0.13 $ 0.13
============ ============ ============ ============
</TABLE>
F-34
<PAGE>
NOTE 24 - SUBSEQUENT EVENTS
- ---------------------------
On February 18, 1999, the Board of Directors of the Company and Medical
Alliance, Inc. ("MAII") unanimously approved and entered into a definitive
agreement pursuant to which Medical Alliance, Inc. will merge with and into a
wholly-owned subsidiary of the Company. Once the transaction is finalized, the
combined entity will be called Medical Alliance, Inc., and its common stock will
trade on the NASDAQ National Market under the symbol MAII. Under the terms of
the agreement, holders of the Medical Alliance common stock will receive a fixed
ratio of 1.57 shares of the Company's common stock for each share of Medical
Alliance common stock. The transaction, which is expected to be accounted for
as a pooling-of-interests, is subject to approval by the shareholders of both
companies, various state and federal regulatory agencies, and certain other
conditions. Closing of the transaction is expected to occur by the end of the
second quarter of 1999.
F-35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors, and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Max W. Batzer (1) 55 Chairman of the Board of Directors
Brad A. Hummel (2) 42 Director, President, Chief Executive Officer
and Chief Operating Officer
Thomas M. Sestak (1)(2) 56 Director
Bo W. Lycke (1)(2) 53 Director
James R. Angelica 51 Director and Senior Vice President
Bonnie G. Lankford 43 Sr. Vice President - Operations
Don W. Caughron 43 Vice President - Finance
Christopher L. Turner 38 Chief Financial Officer
Mark J. Foley 36 Vice President - Sales and Marketing
</TABLE>
_____________
(1) Member of the compensation committee
(2) Member of the audit committee
The Board of Directors of the Company is divided into three classes of an equal
(or as nearly equal as possible) number of Directors, with each Director serving
for a term of three years, and with elections for only one class of directors to
be held in each year. Mr. Sestak's and Mr. Lycke's seats next come up for
election on or about May 31, 1999, Mr. Hummel's seat next comes up for election
on or about May 31, 2000, and Mr. Batzer's and Mr. Angelica's seats next come up
for election on or about May 31, 2001.
The following is a summary of the business experience of each executive officer,
director and key employee.
Max W. Batzer has been Chairman of the Board and of the Company since 1987, was
Chief Executive Officer from 1987 to January 1999, and a stockholder and
Director of the Company since its inception in 1983. From 1981 to 1991, Mr.
Batzer was also President of General Hide & Skin Corporation, a worldwide
commodity trading organization headquartered in New York City. In addition, Mr.
Batzer has also, at various times during the past 20 years, worked as an analyst
for Pan American World Airways, served as Vice President for Marketing for World
Courier Inc., and served as a director and
17
<PAGE>
executive committee member of Simmons Airlines, Inc. (which was a publicly
traded company that was purchased by and is now a subsidiary of American
Airlines). Mr. Batzer holds a B.S.E. degree from The Wharton School at the
University of Pennsylvania, and a M.B.A. degree from the University of Arizona.
Brad A. Hummel was named Chief Executive Officer in January 1999, and has been
President and Chief Operating Officer of the Company since January 1987. Mr.
Hummel was also Chief Financial Officer of the Company from February 1994 to
April 1997, and was employed by the Company in other capacities from 1984 to
1986. From 1981 to 1984, Mr. Hummel was an associate with Covert, Crispin and
Murray (a Washington, D.C. and London-based management consulting firm), and
from 1979 to 1981, Mr. Hummel served as an executive assistant to United States
Senator John C. Culver. Mr. Hummel holds a bachelor's degree (with honors) from
the University of Iowa.
Thomas M. Sestak has been a Director of the Company since its inception in 1983,
and was the Secretary of the Company from November 1987 to March 1993. Mr.
Sestak has also been employed since 1972 as the Chairman and Chief Executive
Officer of Standard Construction of San Francisco, Inc. (a general construction
contractor operating in the greater San Francisco area). Mr. Sestak holds a
B.S.E. degree from The Wharton School at the University of Pennsylvania.
Bo W. Lycke has been a Director of the Company since April 1993. Since February
1991, Mr. Lycke has been employed as Chairman of the Board and Chief Executive
Officer of Claimsnet.com and its affiliate, National Financial Corporation, each
of which is engaged in providing financial services to various medical
businesses. Mr. Lycke holds a M.B.A. degree from the University of Goteborg,
Sweden.
James R. Angelica was appointed a Director and Vice President-Sales of the
Company in September 1994, upon the consummation of the Company's acquisition of
Mobile Diagnostic Imaging, Inc. ("MDI"), and was promoted to Senior Vice
President in January 1996. From June 1991 through September 1994, Mr. Angelica
was the President and Chief Operating Officer of MDI. From June 1990 through
June 1991, Mr. Angelica was an Executive Vice President of Cost Management
Technologies, a third-party insurance claims administrator headquartered in St.
Louis. From May 1981 through January 1990, Mr. Angelica was an Executive Vice
President of Group Health Plan, a health insurance administrator headquartered
in St. Louis. Mr. Angelica holds a bachelor's degree in business administration
from Pacific University.
Bonnie G. Lankford has been Senior Vice President-Operations of the Company
since January 1996, and has been employed in other management capacities by the
Company at all times since 1985. Ms. Lankford has received a certification in
echocardiography from Grossmont College, and is a registered diagnostic medical
sonographer in both echocardiology and obstetrics/gynecology.
Don W. Caughron has been Vice President-Finance of the Company since January
1996, and has been employed in other financial capacities with the Company at
all times since April 1994. From May 1993 to April 1994, Mr. Caughron was a
self-employed accountant. From 1990 to 1993, Mr. Caughron was Corporate
Controller for Actuarial Computer Technology, Inc., a privately held Dallas-
based actuarial computer software company. Mr. Caughron is a Certified Public
Accountant in the State of Texas, and a member of the Texas Society of CPA's as
well as the American Institute of CPA's. Mr. Caughron holds a B.B.A. degree
from Texas Tech University.
Christopher L. Turner has been Chief Financial Officer of the Company since
April 1997. Prior to joining the Company, from 1992 to April 1997, Mr. Turner
was a self-employed certified public accountant and a shareholder in the Dallas,
Texas firm of Turner & Turner, P.C. Mr. Turner began his career as an internal
auditor for Interfirst Bank, and also worked for the Texas firm of Philip Vogel
& Co., and the national public accounting firm Grant Thornton. He is a member of
the American Institute of Certified Public Accountants (AICPA) and the Texas
Society of Certified Public Accountants (TSCPA) where he
18
<PAGE>
has been active on various committees. Mr. Turner received his BSBA from
Missouri Southern State College in 1983, and Master of Accountancy from the
University of Missouri in 1984, and was granted his CPA license in 1985.
Mark J. Foley has been Vice President - Sales and Marketing of the Company since
April 1997. Prior to joining the Company, Mr. Foley was General Manager
(Midwest Region) of the Diagnostic Services Division of National Medical Care,
Inc. (and its predecessor company, Mediq Imaging Services) from 1989 to 1997,
where he was responsible for one of that company's largest geographic
territories. He received a B.S. in Business Administration from Fitchburg State
College in 1984, and a M.B.A., Concentration in Marketing from the University of
Massachusetts, Boston, in 1994.
The Company is not aware of any person who, at any time during the fiscal year
ended December 31, 1998, was a director, officer, or beneficial owner of more
than 10% of the Company's common stock that failed to timely file any reports
required by Section 16(a) of the Exchange Act during the most recent fiscal
year, or prior years, except that (a) following the consummation of the
Company's initial public offering in June 1993, each of the directors and
officers of the Company was late in filing his or her Form 3 (all of which
filings have since been made), and (b) Christopher L. Turner and Mark J. Foley
were late in filing their respective Form 3s upon their becoming executive
officers of the Company (both of which filings have since been made).
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by the
Company to its Chief Executive Officer and all executive officers who earned
greater than $100,000 in 1998 (the "Named Officers"):
<TABLE>
<CAPTION>
Other Restricted
Annual Stock Options/ LTIP All Other
Name & Principal Position Year Salary Bonus Compensation(1) Awards SAR's (#) Payouts Compensation(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Max W. Batzer 1998 380,117 36,000 0 0 15,000 0 253,138
Chairman and CEO 1997 345,000 15,000 0 0 210,000 0 0
1996 305,900 20,000 0 0 0 0 0
Brad A. Hummel 1998 288,840 27,000 0 0 15,000 0 234,388
President and COO 1997 260,000 10,000 0 0 183,000 0 269,389
1996 225,570 15,000 0 0 0 0 0
Christopher L. Turner (3) 1998 153,172 0 0 0 1,000 0 0
Chief Financial Officer 1997 103,125 0 0 0 150,000 0 24,640
1996 -- -- 0 0 0 0 0
Bonnie G. Lankford 1998 145,020 0 0 0 2,000 0 135,841
Sr. V.P. - Operations 1997 135,000 16,000 0 0 45,000 0 121,585
1996 99,420 0 0 0 0 0 0
</TABLE>
___________________
(1) Does not include benefits or perquisites in an aggregate amount, as to each
person, which is less than the lesser of $50,000 or 10% of the total salary and
bonus for the subject year.
(2) Represents compensation arising from the exercise of non-qualified stock
options.
(3) Represents compensation from commencement of such individual's employment
in 1997.
19
<PAGE>
A table detailing the stock options granted to Named Officers and directors is
included under the heading "Stock Option Plans" below.
The Company does not pay directors' fees. Rather, the Compensation Committee of
the Company's Board of Directors is authorized to consider the grant of non-
qualified stock options to members of the Board, consistent with the Company's
philosophy of incentivizing directors to foster, contribute to and participate
in the Company's growth.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Max W. Batzer, pursuant to which
Mr. Batzer is to serve as Chairman of the Company through December 31, 2001.
The agreement provides for payments to Mr. Batzer at the rate of $250,000 per
annum (of which $50,000 per annum is designated as compensation for ongoing
services, and the balance of which is treated as consideration for the
restructuring of his prior employment arrangements with the Company), and
benefits comparable to those provided to other Company employees. Although Mr.
Batzer presently devotes the majority of his business time to the Company, his
employment agreement permits him to engage in other business activities that are
not competitive with the business of the Company and that do not materially
interfere with his performance of his duties and responsibilities to the
Company.
The Company has an employment agreement with Brad A. Hummel, pursuant to which
Mr. Hummel is to serve as Chief Executive Officer, President and Chief Operating
Officer of the Company through December 31, 2002. The employment agreement
provides for a minimum base salary of $310,500 per annum, and benefits
comparable to those provided to other Company employees. The agreement further
provides for Mr. Hummel to devote substantially all of his business time to the
performance of his duties and responsibilities to the Company. Mr. Hummel's
employment agreement grants him the right to elect, within one year after any
change in control of the Company, to terminate his employment on not less than
90 days' prior written notice, and thereafter receive his salary and benefits
for a period of 24 months or to the scheduled expiration date of such employment
agreement (whichever is later). Such salary continuation is also applicable in
the event that the Company terminates such individual's employment (other than
"for cause") within one year after any change in control of the Company. For
purposes of such agreements, a "change in control" is deemed to occur at such
time as 20% of the total outstanding votes eligible to vote for directors of the
Company are owned (legally or beneficially) by any person (or group of persons
acting in concert) who was not a stockholder of the Company as of March 13,
1996.
The Company also has employment agreements with Bonnie G. Lankford, Christopher
L. Turner and Mark J. Foley. Ms. Lankford's employment agreement (as amended)
calls for her to serve as Senior Vice President-Operations of the Company
through December 31, 1999, at a minimum base salary of $150,000 per annum, and
benefits comparable to those provided to other Company employees. Mr. Turner's
employment agreement calls for him to serve as Chief Financial Officer of the
Company through March 31, 1999, and provides for a fixed annual salary of
$165,000 per annum and benefits comparable to those provided to other Company
employees. Mr. Foley's employment agreement calls for him to serve as Vice
President - Sales and Marketing of the Company through May 31, 1999, and
provides for a fixed annual salary of $135,000 per annum, commissions on certain
new account revenues in excess of business development budgets, and benefits
comparable to those provided to other Company employees.
Any increases in the annual rates of compensation of Messrs. Batzer and Hummel
under their employment agreements must be approved by a majority of both the
disinterested directors and the Compensation Committee of the Company's Board of
Directors.
STOCK OPTION PLANS
On April 15, 1992, the stockholders of the Company approved the Company's 1992
Stock Option Plan, as previously adopted by the Company's Board of Directors
(the "1992 Plan"), pursuant to which
20
<PAGE>
officers, directors, and/or key employees and/or consultants of the Company can
receive incentive stock options and non-qualified stock options to purchase up
to an aggregate of 903,509 shares of the Company's Common Stock (of which no
more than 180,702 shares may be pursuant to qualified incentive stock options,
and no more than 722,807 shares may be pursuant to non-qualified stock options).
As of March 1, 1999, there are outstanding, under the 1992 Plan, stock options
for an aggregate of 526,601 shares of common stock at exercise prices ranging
from $.93 to $8.625 per share, and expiring at various times from January 1999
through April 2005. The weighted average exercise price under such options is
approximately $1.97 per share. The exercise prices applicable under such
outstanding stock options represent not less than 100% of the fair market value
of the underlying Common Stock as of the date that such options were granted, as
determined from the closing bid price most recently quoted in the over-the-
counter "pink sheets" or on the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") prior to the date that such options were
granted.
With respect to incentive stock options, the 1992 Plan provides that the
exercise price of each such option must be at least equal to 100% of the fair
market value of the Common Stock on the date that such option is granted (and
110% of fair market value in the case of stockholders who, at the time the
option is granted, own more than 10% of the total outstanding Common Stock), and
requires that all such options have an expiration date not later than that date
which is one day before the tenth anniversary of the date of the grant of such
options (or the fifth anniversary of the date of grant in the case of 10%
stockholders). However, with certain limited exceptions, in the event that the
option holder ceases to be associated with the Company, or engages in or is
involved with any business similar to that of the Company, such option holder's
incentive options immediately terminate. Pursuant to the 1992 Plan, the
aggregate fair market value, determined as of the date(s) of grant, for which
incentive stock options are first exercisable by an option holder during any one
calendar year cannot exceed $100,000.
With respect to non-qualified stock options, the 1992 Plan requires that the
exercise price of all such options be at least equal to 100% of the fair market
value of the Common Stock on the date such option is granted, provided that non-
qualified options may be issued at a lower exercise price (but in no event less
than 85% of fair market value) if the net pre-tax income of the Company in the
full fiscal year immediately preceding the date of the grant of such option (the
"Prior Year") exceeded 125% of the mean annual average net pre-tax income of the
Company for the three fiscal years immediately preceding such Prior Year. Non-
qualified options must have an expiration date not later than that date which is
the day before the eighth anniversary of the date of the grant of the subject
option. However, with certain limited exceptions, in the event that the option
holder ceases to be associated with the Company, or engages in or becomes
involved with any business similar to that of the Company, such option holder's
non-qualified options immediately terminate.
The 1992 Plan further provides that non-qualified options may (but need not)
include a provision that, in the event of any change in control and management
of the Company or any sale of the business of the Company, except to the extent
that the subject option holder affirmatively elects, during a limited period of
time following such event, to permanently revoke and terminate the subject non-
qualified option (in whole or in part) and/or to reaffirm all or any portion of
such non-qualified option without giving effect to the reduction in exercise
price herein described, then the otherwise applicable exercise price in respect
of such option may thereafter be reduced (but not by more than 50%) in the event
that, and at such time(s) as, the subject option holder thereafter exercises
such option (or the non-revoked and non-reaffirmed portion thereof, as the case
may be). As of March 1, 1999, substantially all of the 526,601 outstanding non-
qualified options under the 1992 Plan contain such provision, and this could
have the effect of delaying or hindering potential change in control or sale
transactions, and/or providing additional compensation or consideration to the
subject option holders in connection with any such transaction that may be
consummated.
In April 1995, in response to the substantial increase in the size of the
Company and its labor force, the Board of Directors of the Company adopted and
approved the Company's 1995 Non-Qualified Stock
21
<PAGE>
Option Plan (the "1995 Non-Qualified Plan"), pursuant to which officers,
directors, and/or key employees and/or consultants of the Company can receive
non-qualified stock options to purchase up to an aggregate of 500,000 shares of
the Company's common stock. The exercise price, expiration date and other terms
of any options granted under the 1995 Non-Qualified Plan are substantially
similar to the requirements applicable to non-qualified options under the 1992
Plan. As of March 1, 1999, there were outstanding, under the 1995 Non-Qualified
Plan, stock options for an aggregate of 235,000 shares of common stock at
exercise prices ranging from $1.93 to $10.25 per share, and expiring at various
times from December 2000 through January 2006. The weighted average exercise
price under such options is $4.11 per share. Approximately 75% of the
outstanding options under the 1995 Non-Qualified Plan contain price reduction
provisions similar to those described in the immediately preceding paragraph.
The Company also maintains a 1995 Incentive Stock Option Plan ("the 1995
Incentive Plan"), as approved by the Company's stockholders on November 22,
1995, pursuant to which key employees of the Company can receive incentive stock
options to purchase up to an aggregate of 500,000 shares of common stock of the
Company. The requirements of the 1995 Incentive Plan are substantially
identical to the provisions of the 1992 Plan which are specifically applicable
to incentive stock options, except that the 1995 Incentive Plan will expire on
August 31, 2005 (after which date no further options may be granted under the
1995 Incentive Plan). As of March 1, 1999, there were outstanding, under the
1995 Incentive Plan, stock options for an aggregate of 237,589 shares of common
stock at exercise prices ranging from $6.25 to $10.69 per share, and expiring at
various times from July 2001 through December 2002. The weighted average
exercise price under such options is $8.72 per share.
In January 1997, the Board of Directors of the Company adopted the Company's
1997 Non-Qualified Stock Option Plan (the "1997 Non-Qualified Plan"), pursuant
to which officers, directors and/or key employees and/or consultants of the
Company can receive non-qualified stock options to purchase up to an aggregate
of 1,000,000 shares of the Company's Common Stock. The exercise price,
expiration date and other terms of any options granted under the 1997 Non-
Qualified Plan are substantially similar to the requirements applicable to non-
qualified options under the 1992 Plan. As of March 1, 1999, there were
outstanding, under the 1997 Non-Qualified Plan, options for an aggregate of
763,861 shares of Common Stock at exercise prices ranging from $7.44 to $10.69
per share and expiring at various times from January 2005 through December 2005.
The weighted average exercise price under such options is $8.71 per share.
Approximately one-third of such options contain price reduction provisions
similar to those described above.
22
<PAGE>
The table set forth below lists information on stock options granted to each of
the Company's Named Officers and directors during the year ended December 31,
1998.
<TABLE>
<CAPTION>
Percent of
Total Options
Granted to Exercise
Type of Number Employees In Price Expiration
Name Option of Shares Fiscal Year Per Share Date
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Max W. Batzer Non-qualified 15,000 9.8% $8.63 June 14, 2005
Brad A. Hummel Non-qualified 15,000 9.8% $8.63 June 14, 2005
James R. Angelica Qualified 2,000 1.3% $8.63 June 14, 2003
Christopher L. Turner Qualified 1,000 0.7% $8.63 June 14, 2003
Bonnie G. Lankford Qualified 2,000 1.3% $8.63 June 14, 2003
</TABLE>
Through December 31, 1998, a total of 621,534 stock options granted under the
Plans had been exercised (261,415 by executive officers and directors).
The following table sets forth all stock option exercises by Named Officers and
directors of the Company during the fiscal year ended December 31, 1998, the
"value" (i.e., the amount by which the fair market value of the underlying
common stock exceeded the option exercise price on the date of exercise)
realized upon such exercises, the number of remaining options held by Named
Officers and directors of the Company as of December 31, 1998, and the "value"
(i.e., the amount by which the fair market value of the underlying common stock
exceeded the option exercise price) as of December 31, 1998 of all unexercised
stock options then held by Named Officers and directors of the Company.
<TABLE>
<CAPTION>
Shares Number of Value of Unexercised
Acquired Value Unexercised In-The-Money
Name on Exercise Realized Options at Fiscal Year End Options at Fiscal Year End
- ---- ----------- -------- -------------------------- --------------------------
<S> <C> <C> <C> <C>
Max W. Batzer 25,000 $253,138 480,505 $198,068
Brad A. Hummel 25,000 $234,388 327,645 $ 50,793
Thomas M. Sestak -- $ -- 181,645 $ 93,414
Bo W. Lycke -- $ -- 83,800 $ 46,259
James R. Angelica -- $ -- 20,000 $ --
Christopher L. Turner -- $ -- 150,000 $ --
Bonnie G. Lankford 17,209 $198,281 72,000 $ 7,219
</TABLE>
23
<PAGE>
Prior to April 16, 1993, the 1992 Plan was administered by the Company's Board
of Directors. Beginning on April 16, 1993, administration of the 1992 Plan was
delegated to the Compensation Committee of the Company's Board of Directors,
which has wide discretion in determining the recipients of options, the amounts
of options awarded, and various other terms and conditions applicable to options
granted under the 1992 Plan. The 1995 Non-Qualified Plan, the 1995 Incentive
Plan and the 1997 Non-Qualified Plan have at all times been administered by the
Compensation Committee, which has similar wide discretion in the administration
thereof. In determining whether and to what extent specific employees or
consultants will be awarded options, the Compensation Committee takes into
account the value of the specific individual's services to the Company, the
individual's time in service, the long-term prospects for the individual to
handle additional responsibilities within the Company, and such other factors as
the Compensation Committee may deem relevant in order to reward and motivate the
Company's employees and consultants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 1999, the number of shares of the
Company's Common Stock owned by each person (including any "group" as used in
Section 13(d)(3) of the Exchange Act) known to the Company to be the beneficial
owner of more than five percent of the Company's common stock, each director of
the Company, and all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Beneficially
Name and Address of Beneficial Owner Owned Percentage
- ------------------------------------ ------------ ----------
<S> <C> <C>
Max W. Batzer 635,255 (1) 5.3%
2777 Stemmons
Dallas, Texas 75207
Thomas M. Sestak 308,066 (2) 2.6%
1226 Ninth Avenue
San Francisco, California 94122
Brad A. Hummel 336,238 (3) 2.8%
2777 Stemmons
Dallas, Texas 75207
Bo W. Lycke 84,800 (4) 0.7%
2777 Stemmons
Dallas, Texas 75207
James R. Angelica 335,052 (5) 2.7%
9717 Landmark Parkway Drive
St. Louis, Missouri 63127
All directors and executive officers
as a group (ten persons) 1,987,322 (6) 15.5%
</TABLE>
__________________
(1) Includes 480,505 shares which are subject to stock options exercisable
within 60 days.
(2) Includes 452 shares held by Mr. Sestak as custodian for his minor children,
and 181,645 shares which are subject to stock options exercisable within 60
days.
(3) Includes 327,645 shares which are subject to stock options exercisable
within 60 days.
(4) Includes 83,800 shares which are subject to stock options exercisable within
60 days.
(5) Includes 20,000 shares which are subject to stock options exercisable
within 60 days. Of the 335,052 outstanding shares, 116,800 are held jointly
by Mr. Angelica and his spouse.
(6) Includes 1,345,595 stock options exercisable within 60 days.
24
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1989, Max W. Batzer, Thomas M. Sestak and Brad A. Hummel borrowed
$66,000, $10,000 and $33,000, respectively, from the Company. The proceeds of
these loans were utilized by Messrs. Batzer, Sestak and Hummel to purchase
shares of common stock. The loans were amended and restated as of January 1,
1993, such that the loans now bear simple interest at a certain bank's prime
rate (adjusted annually for purposes of the loans), with payment of all
principal and accrued interest due on December 31, 2000. Mr. Sestak's loan was
repaid in full in October 1993. Mr. Batzer's and Mr. Hummel's loans are non-
recourse, and are secured solely by shares of common stock of the Company having
an aggregate market value equal to 50% of the outstanding loan obligations
(provided that the number of shares pledged as collateral will never exceed the
number of shares (185,265 in the case of Mr. Batzer, and 92,633 in the case of
Mr. Hummel) purchased with the proceeds of the loans. The Company has retained a
right of first refusal in connection with any proposed sale of the pledged
shares while they remain subject to such pledge, although the Company is
prohibited, under its loan agreement with Chase Bank of Texas, N.A. ("Chase"),
to redeem or purchase any shares of its common stock without Chase's prior
consent.
In April 1996, in connection with the Company's private placement of the Bridge
Notes and Bridge Warrants, an aggregate of $50,000 of Bridge Notes and 2,500
Bridge Warrants were purchased by James R. Angelica, and $100,000 of Bridge
Notes and 5,000 Bridge Warrants were purchased by Thomas M. Sestak. All of such
Bridge Notes have since been repaid, and all of such Bridge Warrants have since
been exercised.
25
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, LIST AND REPORTS ON FORM 8-K
Item 14(a) (1), 14(a) (2) and 14(d):
The following financial statement schedule is filed as a part of this Report at
page 29 hereof:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required, not applicable or
the information is included in the consolidated financial statements and notes
thereto.
Item 14(a) (3) and 14(c)
Exhibits Description of Exhibit
- -------- ----------------------
3.1 Certificate of Incorporation of the Company, as amended. (1)
3.2 By-Laws of the Company. (1)
3.3 Certificate of Amendment of Certificate of Incorporation of
the Company, authorizing preferred stock of the Company. (2)
3.4 Certificate of Stock Designation, creating Series A Preferred
Stock. (4)
4.1 1992 Stock Option Plan, including forms of qualified incentive
stock option agreement and non-qualified stock option
agreement. (1)
4.2 Form of Underwriter's Warrant. (1)
4.3 Specimen Form of Share Certificate. (1)
4.4 1995 Nonqualified Stock Option Plan. (2)
4.5 1995 Incentive Stock Option Plan. (2)
4.6 Form of Bridge Warrant and Bank Warrant. (3)
4.7 1997 Non-Qualified Stock Option Plan. (5)
10.1 Employment Agreement, dated November 1, 1991 between the
Company and Max W. Batzer. (1)
10.2 Amendment, dated March 13, 1996, to Employment Agreement
between the Company and Max W. Batzer. (3)
10.3 Amendment, dated January 1, 1998, to Employment Agreement
between the Company and Max W. Batzer. (8)
10.4 Employment Agreement, dated November 1, 1991, between the
Company and Brad A. Hummel. (1)
10.5 Amendment, dated March 13, 1996, to Employment Agreement
between the Company and Brad A. Hummel. (3)
10.6 Amendment, dated January 1, 1998, to Employment Agreement
between the Company and Brad A. Hummel. (8)
10.7 Lease Agreement for Dallas headquarters. (1)
10.8 Agreement between the Company and Northeast Community Hospital
(Bedford, Texas). (1)
10.9 Agreement between the Company and Central Texas Medical Center
(San Marcos, Texas). (1)
26
<PAGE>
10.10 Contingent Share Agreement between the Company and former
owner of Medmark. (2)
10.11 Contingent Payment Agreement between the Company and the
former owner of Reliascan. (2)
10.12 Contingent Share Agreement between the Company and the former
stockholder of HDII. (2)
10.13 Amended and Restated Loan Agreement, dated as of July 24,
1996, among the Company, its subsidiaries and Chase Bank of
Texas, N.A., formerly Texas Commerce Bank National Association
("Chase"). (5)
10.14 Asset Purchase Agreement, dated September 27, 1996, by and
among the Company, DHS Management Services, Inc., Advanced
Clinical Technology, Inc., Horizon MDS Corporation, and
Horizon/CMS Healthcare Corporation. (4)
10.15 Asset Purchase Agreement, dated March 21, 1997 (but as of an
effective date of March 1, 1997), relating to first DIS
acquisition. (6)
10.16 Stock Purchase Agreement, dated March 21, 1997, relating to
the second DIS acquisition. (7)
10.17 Note Agreement, dated as of April 16, 1997, between the
Company and Prudential. (7)
10.18 Second Amended and Restated Loan Agreement, dated as of
December 31, 1998, among the Company, its subsidiaries and
Chase.
10.19 First Amendment to Note Agreement, dated as of December 31,
1998, between the Company and Prudential.
10.20 Amended Employment Agreement, dated January 8, 1999, between
the Company and Max W. Batzer.
10.21 Agreement and Plan of Merger, dated February 18, 1999, between
the Company and Medical Alliance, Inc.
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the Company.
27 Financial Data Schedule (Securities and Exchange Commission
EDGAR filing only)
___________________
(1) Incorporated by reference, filed as an exhibit to Amendment No. 2 to the
Company's Registration Statement on Form SB-2 filed on June 11, 1993, SEC
File No. 33-61392-FW.
(2) Incorporated by reference, filed as an exhibit to the Company's report on
Form 10-KSB filed on April 1, 1996.
(3) Incorporated by reference, filed as an exhibit to the Company's
Registration Statement on Form SB-2 filed on April 25, 1996, SEC File No.
333-4034.
(4) Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on November 26, 1996.
27
<PAGE>
(5) Incorporated by reference, filed as an exhibit to the Company's report on
Form 10-KSB filed on March 31, 1997.
(6) Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on April 4, 1997.
(7) Incorporated by reference, filed as an exhibit to the Company's report on
Form 8-K filed on May 2, 1997.
(8) Incorporated by reference, filed as an exhibit to the Company's report on
Form 10-KSB filed on March 31, 1998
Item 14(b):
No reports on Form 8-K were filed by the Company during the fourth quarter of
the Company's 1998 fiscal year.
28
<PAGE>
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES.
------------------------------------------------
SCHEDULE II - VALUATION OF QUALIFING ACCOUNTS
---------------------------------------------
<TABLE>
<CAPTION>
Balance at Acquisitions Charged Charged Balance at
beginning and to to other end of
of period dispositions operations accounts Deductions period
---------- ------------ ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful accounts $ 612,437 $ 14,124 $1,913,004 $864,637 $1,975,566 $1,428,636
========== ============ ========== ======== ========== ==========
Year ended December 31, 1997
Allowance for doubtful accounts $1,413,168 $ 349,501 $ 890,161 $ -- $2,040,393 $ 612,437
========== ============ ========== ======== ========== ==========
Year ended December 31, 1996
Allowance for doubtful accounts $ 114,817 $ 1,871,649 $ 40,970 $ -- $ 614,268 $1,413,168
========== ============ ========== ======== ========== ==========
</TABLE>
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: March 16, 1999
DIAGNOSTIC HEALTH SERVICES, INC.
By: /S/ Max W. Batzer
---------------------------------------
Max W. Batzer, Chairman
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- --------------------- -------------------------
<S> <C> <C>
/S/ Max W. Batzer
- --------------------------
Max W. Batzer Chairman and Director March 16, 1999
/S/ Brad A. Hummel
- --------------------------
Brad A. Hummel Chief Executive Officer, President, March 16, 1999
Chief Operating Officer and Director
/S/ Christopher L. Turner
- --------------------------
Christopher L. Turner Chief Financial Officer and March 16, 1999
Principal Accounting Officer
/S/ Bo W. Lycke
- --------------------------
Bo W. Lycke Director March 16, 1999
</TABLE>
30
<PAGE>
Exhibit 10.18
SECOND AMENDED AND RESTATED LOAN AGREEMENT
Among
DIAGNOSTIC HEALTH SERVICES, INC.,
as Borrower,
and
THE SUBSIDIARIES OF BORROWER
IDENTIFIED ON THE SIGNATURE
PAGES HERETO,
as Guarantors,
and
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION,
as Bank
as of December 31, 1998
$9,952,930.10
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 1
<PAGE>
TABLE OF CONTENTS
PAGE
<TABLE>
<S> <C>
1. Definitions................................................. 1
2. Commitments of Bank......................................... 11
3. Notes Evidencing Loans...................................... 13
4. Interest Rates for Loans.................................... 14
5. Collateral Security and Guaranties.......................... 14
6. Waiver of Reporting, Financial Covenant and Other Defaults.. 15
7. Fees........................................................ 16
8. Prepayments................................................. 16
9. Representations and Warranties.............................. 17
10. Conditions of Lending....................................... 21
11. Affirmative Covenants....................................... 23
12. Negative Covenants.......................................... 30
13. Events of Default........................................... 34
14. Exercise of Rights.......................................... 37
15. Notices..................................................... 38
16. Expenses.................................................... 38
17. Indemnity; Capital Adequacy................................. 38
18. GOVERNING LAW............................................... 40
19. Invalid Provisions.......................................... 40
20. Maximum Interest Rate....................................... 40
21. Amendments.................................................. 41
22. Multiple Counterparts, Etc.................................. 41
23. Conflict.................................................... 41
24. Survival.................................................... 41
25. Parties Bound............................................... 41
26. Participations.............................................. 41
27. WAIVER OF TRIAL BY JURY..................................... 42
28. WAIVER OF CONSUMER RIGHTS................................... 42
29. OTHER AGREEMENTS............................................ 42
</TABLE>
i
<PAGE>
SECOND AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AGREEMENT (hereinafter referred to as
this "Agreement") is executed as of December 31, 1998, among DIAGNOSTIC HEALTH
SERVICES, INC., a Delaware corporation (hereinafter referred to as "Borrower"),
the SUBSIDIARIES OF BORROWER IDENTIFIED ON THE SIGNATURE PAGES HERETO
(hereinafter collectively referred to, together with any other corporations or
other entities that pursuant to Section 11 (q) shall become a "Guarantor"
hereunder, as "Guarantors," and singularly as a "Guarantor"), and CHASE BANK OF
TEXAS, NATIONAL ASSOCIATION, a national banking association (hereinafter
sometimes referred to as "Bank").
W I T N E S S E T H:
WHEREAS, Borrower, certain of Guarantors and Bank entered into that certain
Amended and Restated Loan Agreement dated July 24, 1996, as amended by that
certain First Amendment to Amended and Restated Loan Agreement dated as of April
16, 1997, that certain Second Amendment to Amended and Restated Loan Agreement
dated as of May 1, 1997, that certain Third Amendment to Amended and Restated
Loan Agreement dated as of May 7, 1998 and that certain Fourth Amendment to
Amended and Restated Loan Agreement, dated as of June 18, 1998 (as so amended,
the "Prior Agreement");
WHEREAS, Borrower is indebted to Bank in the principal amount of
$7,952,930.10, exclusive of accrued interest, under the terms of the Prior
Agreement, which indebtedness represents advances under a multiple draw advance
term loan then available to Borrower and the commitment with respect to which is
now extinguished;
WHEREAS, as of the date hereof, Borrower is in default of the Prior
Agreement;
WHEREAS, on the terms and conditions set forth herein Bank has agreed to
waive Reporting Defaults and Financial Covenant Defaults under the Prior
Agreement outstanding through and including November 30, 1998 and all Lease
Defaults under the Prior Agreement as of the date hereof, in each case subject
to the conditions as stated herein;
WHEREAS, Borrower, Guarantors and Bank desire to confirm the extinguishment
of the commitment of Bank under the Prior Agreement; and
WHEREAS, Borrower has requested that Bank provide Borrower with a revolving
credit facility in the principal amount of up to $2,000,000, and Bank is willing
to make such facility available to the Borrower on the terms and conditions set
forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. DEFINITIONS. When used herein the terms "Agreement," "Borrower,"
"Bank" and "Guarantors" shall have the meanings indicated above. When used
herein the following terms shall have the following meanings:
<PAGE>
Accounts - All present and future accounts, accounts receivable and
--------
other rights of Borrower and Guarantors to payment for the sale or lease of
goods or the rendition of services (except those evidenced by instruments
or chattel paper), whether now existing or hereafter arising and wherever
arising.
Acquisition - The acquisition by Borrower or any Guarantor of the
-----------
stock of, any other equity security or other interest in, or, in a
transaction outside the ordinary course of business, the assets of, any
other Person.
Advance or Advances - A loan or loans under the Revolving Loan or the
-------------------
Advance Term Loan.
Advance Term Loan Maturity Date - June 30, 2001.
-------------------------------
Advance Term Loan - The multiple advance term loan made under the
-----------------
Prior Agreement.
Advance Term Loan Commitment - The commitment contained in Section
----------------------------
2(a) of the Prior Agreement.
Advance Term Note - That certain amended and restated multiple advance
-----------------
term note in the stated principal amount of $7,952,930.10 and further
described in Section 3(a).
Borrowing Base Certificate - A certificate the form of which is set
--------------------------
forth as Exhibit "E" hereto to be delivered to Bank by Borrower at the
times and on the dates specified herein, showing the status of Borrower's
Accounts as of the date of such Borrowing Base Certificate.
Borrowing Date - The date, which shall be a Business Day, elected by
--------------
Borrower pursuant to Section 2(a)(2) for an Advance on the Revolving Loan.
Borrowing Increase Event - An event, or series of events, which, in
------------------------
the sole discretion of Bank, warrants (i) an increase in the Revolving Loan
Commitment from $1,000,000 to $2,000,000; (ii) an extension of the
Revolving Maturity Date; or (iii) both (i) and (ii).
Business Day - The normal banking hours during any day (other than
------------
Saturdays or Sundays) that banks are legally open for business in Dallas,
Texas.
Change of Control - If (a) Brad A. Hummel (and any trust controlled by
-----------------
such individual as sole trustee and for his benefit and/or the benefit of
his immediate family members) (i) owns outstanding capital stock of
Borrower in an aggregate amount equal to or less than fifty percent (50%)
of the shares of Borrower's capital stock owned by him on November 30,
1998, or (ii) transfers any stock options exercisable for shares of
Borrower's capital stock (except any deemed transfer resulting from the
exercise,
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 2
<PAGE>
expiration or surrender thereof), unless in either case the transaction
giving rise to such sale or transfer results in the payment in full of the
Advance Term Loan or (b) a Change in Control (as defined in the
Subordinated Note Agreement) occurs.
Change of Management - If Brad Hummel ever ceases to be the President
--------------------
and Chief Executive Officer of Borrower.
Commitment Fee - As defined in Section 7.
--------------
Contract Accounting Contract - Any contract or agreement (a) whose
----------------------------
value and related expenses are recognized by Borrower or a Guarantor on a
present value basis at the inception of such contract or agreement
(regardless of whether rights under such contract or agreement have or have
not been sold) or (b) accounted for consistent with Borrower's or a
Guarantor's accounting policy for its long-term contracts prior to the
change in such policy, effective October 1, 1998, announced in Borrower's
Form 10-Q for the fiscal quarter ended September 30, 1998.
Cure Evidence - As defined in Section 6.
-------------
Current Assets - The total amount of Borrower's consolidated current
--------------
assets, determined in accordance with GAAP.
Current Liabilities - The total amount of Borrower's consolidated
-------------------
current liabilities, determined in accordance with GAAP.
Current Ratio - The ratio of Current Assets to Current Liabilities,
-------------
determined in accordance with GAAP.
EBITDA - Borrower's consolidated net income, determined in accordance
------
with GAAP, before provision for income taxes, interest expense,
depreciation and amortization to the extent actually deducted in arriving
at net income (and in any event before provision for that certain
restructuring and impairment expense in the amount of $5,518,489 incurred
by Borrower and its consolidated subsidiaries in the fiscal quarter ended
June 30, 1998, as reported on Borrower's Form 10-Q for such quarter filed
with the Securities and Exchange Commission), minus extraordinary income,
-----
plus extraordinary loss, minus amounts that would otherwise constitute
---- -----
EBITDA in the subject twelve-month period which are derived from Contract
Accounting Contracts, with all of the foregoing being determined in
accordance with GAAP, in all cases without duplication.
Eligible Accounts - All Accounts that (i) are not due from a Person
-----------------
related to or affiliated with Borrower or any Guarantor; (ii) are not
subject to pending disputes or counterclaims, or offset; (iii) are not
outstanding for more than ninety (90) days from the date of invoice for
such Account; (iv) are not due from an account debtor that is failing,
generally, to pay its debts as they become due or that has suffered the
termination of its existence or as to which a dissolution or insolvency
proceeding is pending or an
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 3
<PAGE>
assignment for the benefit of creditors has been made, or for which a
trustee, receiver or conservator has been appointed, for all or any part of
the property belonging to said account debtor; (v) are not due from an
account debtor that does not reside in or is not subject to process in the
United States of America, except to the extent payment of the subject
Account(s) is secured by a letter of credit issued by a domestic bank,
which letter of credit and bank are acceptable to Bank in all respects;
(vi) are subject to a valid, first priority perfected Lien in favor of
Bank; and (vii) are not Accounts commonly known as consignment or "bill and
hold." In addition, monies due from any federal, state, county, city or
-- --------
local government or governmental agency in connection with the payment of
any and all taxes or assessments, including, but not limited to, any
federal income tax refunds shall not be deemed Eligible Accounts. In
--
addition, the total balance of any Account that has in excess of twenty
--------
percent (20%) of its balance outstanding over ninety (90) days from the
date of invoice for such account shall not be deemed an Eligible Account;
and provided, further, that if any Accounts due from any single account
-------- -------
debtor would exceed ten percent (10%) of Borrower's total aggregate
Accounts, then the amount of such Accounts owed by such account debtor
constituting such excess shall not be deemed Eligible Accounts.
Environmental Laws - The Comprehensive Environmental Response,
------------------
Compensation and Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986, 42 U.S.C.A. (S) 9601, et seq.,
-- ---
the Resource Conservation and Recovery Act, as amended by the Hazardous
Solid Waste Amendment of 1984, 42 U.S.C.A. (S) 6901, et seq., the Clean Air
-- ---
Act, 42 U.S.C.A. (S) 1251, et seq., the Toxic Substances Control Act, 15
-- ---
U.S.C.A. (S) 2601, et seq., The Oil Pollution Act of 1990, 33 U.S.C. (S)
-- ---
2701, et seq., and all other laws, statutes, codes, acts, ordinances,
-- ---
orders, judgments, decrees, injunctions, rules, regulations, order and
restrictions of any federal, state, county, municipal and other
governments, departments, commissions, boards, agencies, courts,
authorities, officials and officers, domestic or foreign, relating to air
pollution, water pollution, noise control and/or the handling, discharge,
disposal or recovery of on-site or off-site asbestos or "hazardous
substances" as defined by 42 U.S.C. (S) 9601, et seq., as amended, as each
-- ---
of the foregoing may be amended from time to time.
Environmental Liability - Any claim, demand, obligation, cause of
-----------------------
action, accusation, allegation, order, violation, damage, injury, judgment,
penalty or fine, cost of enforcement, cost of remedial action or any other
costs or expense whatsoever, including reasonable attorneys' fees and
disbursements, resulting from the violation or alleged violation of any
Environmental Law or the imposition of any Environmental Lien.
Environmental Lien - A Lien in favor of any court, governmental agency
------------------
or instrumentality or any other Person (i) for any Environmental Liability
or (ii) for damages arising from or cost incurred by such court or
governmental agency or instrumentality or other person in response to a
release or threatened release of hazardous or toxic waste, substance or
constituent into the environment.
Equipment - All of Borrower's and Guarantors' present and future (i)
---------
equipment and fixtures, including, without limitation, wherever located,
machinery, manufacturing,
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 4
<PAGE>
distribution, selling, data processing and office equipment, furniture,
furnishings, assembly systems, tools, tooling, molds, dies, appliances and
vehicles and any accessories thereto, (ii) other tangible personal property
(exclusive of Inventory), and (iii) any and all accessories, parts and
appurtenances attached to any of the foregoing or used in connection
therewith, and any substitutions therefor and replacements, products and
proceeds thereof.
ERISA - The Employee Retirement Income Security Act of 1974, as
-----
amended.
Event of Default - An event constituting an Event of Default as
----------------
defined by and pursuant to Section 13.
Excess Cash Flow - An amount, for Borrower's immediately preceding
----------------
fiscal year, equal to Borrower's consolidated net income plus:
----
depreciation, amortization, non-cash taxes and other non-cash charges,
minus: non-cash gains, scheduled principal payments on Funded Debt
-----
(including, without limitation, the principal component of any payments in
respect of capital lease obligations), any voluntary prepayments of the
Advance Term Loan, interest expense paid in cash and Unleveraged Capital
Expenditures (the latter being limited to $500,000 for purposes of this
definition), with all such amounts being determined on a consolidated basis
for Borrower's immediately preceding fiscal year.
Federal Funds Effective Rate - Federal Funds Effective Rate means, for
----------------------------
any period, a fluctuating interest rate per annum equal for each day during
such period to the weighted average of the rates on overnight Federal fund
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business
Day, of the next preceding Business Day) by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day that is a Business
Day, the average of the quotations for such day on such transactions
received by Bank from three Federal funds brokers of recognized standing
selected by Bank.
Financial Default - As defined in Section 6.
-----------------
Fixed Charges - An amount, for the most recently completed twelve
-------------
calendar months, determined on a consolidated basis in accordance with
GAAP, equal to Borrower's (i) current maturities of long-term indebtedness
and current maturities of capitalized lease obligations, in both cases
determined as of end of such period plus (ii) interest expense (including,
----
without limitation, the interest component of any payments in respect of
capital lease obligations) paid, payable or accrued in such period, each as
determined in accordance with GAAP.
Fixed Charge Coverage Ratio - As at any date, a ratio equal to (i) the
---------------------------
sum of EBITDA for the period of the twelve calendar months ending on, or
most recently ended prior to, such date, less cash taxes paid or payable in
----
such period, less Unleveraged Capital Expenditures paid or payable in such
----
period, divided by (ii) Fixed Charges for such period.
----------
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 5
<PAGE>
Funded Debt - For Borrower and Guarantors, the sum (determined on a
-----------
consolidated basis without duplication in accordance with GAAP) of the
following: (i) obligations created, issued or incurred for borrowed money
(whether by loan, the issuance and sale of debt securities or the sale of
property to another Person subject to an understanding or agreement,
contingent or otherwise, to repurchase such property from such Person);
(ii) obligations to pay the deferred purchase or acquisition price of
property or services, other than trade accounts payable (other than for
borrowed money) arising, and accrued expenses incurred, in the ordinary
course of business so long as such trade accounts payable are payable
within 90 days of the date the respective goods are delivered or the
respective services are rendered; (iii) Funded Debt of others secured by a
Lien on property of Borrower or any Guarantor, whether or not the
respective indebtedness so secured has been assumed; (iv) obligations in
respect of letters of credit or similar instruments issued or accepted by
banks and other financial institutions for account of Borrower or a
Guarantor; (v) capital lease obligations; and (vi) Funded Debt of others
guaranteed by Borrower or a Guarantor.
Funded Debt Ratio - As of any date, the ratio of (i) Funded Debt as of
-----------------
such date to (ii) EBITDA for the period of the twelve calendar months
ending on, or most recently ended prior to, such date.
For purposes of determining the Commitment Fees earned and payable in
accordance with Section 7 and the Prime Rate Margin, the Funded Debt Ratio
is subject to adjustment quarterly (by increase or decrease, as
appropriate), effective only as of the first day of the calendar month next
following the month in which Borrower delivers a Compliance Certificate (in
the form of Exhibit "D") contemporaneously with the quarterly financial
information delivered to Bank pursuant to Section 11(a)(ii) (each such day,
an "Adjustment Date"). After each adjustment of the Commitment Fee or the
Prime Rate Margin resulting from an adjustment in the Funded Debt Ratio, in
accordance herewith, each such Commitment Fee shall thereafter apply, or
each such Prime Rate Margin shall thereafter apply to all Loans then
outstanding or made (i.e., with no retroactivity), until the next
Adjustment Date that a Compliance Certificate delivered contemporaneously
with quarterly financial information required pursuant to Section 11(a)(ii)
demonstrates a change in the Funded Debt Ratio such that other Commitment
Fees or Prime Rate Margin apply. Upon request of Bank, Borrower shall
demonstrate to the reasonable satisfaction of Bank the numerically required
applicable ratio in order to obtain an adjustment to a lower applicable
Commitment Fee or Prime Rate Margin. If Borrower fails to furnish to Bank
any Compliance Certificate by the date required by this Agreement, then the
maximum Commitment Fees shall thereafter apply, or the maximum Prime Rate
Margin shall thereafter apply to all Loans then outstanding or made (i.e.,
with no retroactivity), until Borrower furnishes the required Compliance
Certificate to Bank.
For purposes of this Agreement, as of the date hereof, the Prime Rate
Margin is one and three quarters percent (1.75%) and the Commitment Fee is
one-half of one percent (.50%). The Prime Rate Margin and Commitment Fee
will remain such until an adjustment to the Prime Rate Margin is made in
accordance with the terms of this
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 6
<PAGE>
Agreement on March 1, 1999, being the first Adjustment Date following
execution of this Agreement.
GAAP - Generally accepted accounting principles, applied on a
----
consistent basis, as set forth in Opinions of the Accounting Principles
Board of the American Institute of Certified Public Accountants and/or in
statements of the Financial Accounting Standards Board and/or their
respective successors and that are applicable in the circumstances as of
the date in question. Accounting principles are applied on a "consistent
basis" when the accounting principles applied in a current period are
comparable in all material respects to those accounting principles applied
in a preceding period.
General Intangibles - All of Borrower's and Guarantors' present and
-------------------
future choses in action, causes of action and all other intangible personal
property of every kind and nature, including, without limitation,
corporate, partnership and other business books and records, inventions,
designs, patents, patent applications, trademarks, trademark applications,
trade names, trade secrets, service marks, goodwill, registrations,
copyrights, licenses, franchises, customer lists, computer programs,
software and other computer materials, tax refunds, tax refund claims,
rights and claims against charters, carriers, shippers, franchisees,
lessors, and lessees, and rights to indemnification, intercompany
receivables and any security documents executed in connection therewith,
deposit accounts, proceeds of any letters of credit, indemnity, warranty or
guaranty payable to Borrower or any Guarantor from time to time with
respect to the foregoing or proceeds of any insurance policies on which
Borrower or any Guarantor is named as beneficiary, claims against third
parties for advances and other financial accommodations and any other
obligations whatsoever owing to Borrower or any Guarantor, contract rights,
customer and supplier contracts, rights in and to all security agreements,
security interests or other security held by Borrower or any Guarantor to
secure payment of Borrower's or any Guarantors' accounts, all right, title
and interest under leases, subleases, and concessions and other agreements
relating to real or personal property (including, without limitation, all
rents, issues and profits related thereto), rights in and under guarantees,
instruments, securities, documents of title and other contracts securing,
evidencing, supporting or otherwise relating to any of the foregoing,
together with all rights in any goods, merchandise or Inventory which any
of the foregoing may represent.
Guaranties - The unlimited guaranties heretofore executed and/or
----------
joined in by each of Guarantors for the benefit of Bank.
Interest Payment Date - The last day of each Prime Rate Interest
---------------------
Period.
Inventory - All of Borrower's and Guarantors' present and future (i)
---------
inventory, (ii) goods, merchandise and other personal property furnished or
to be furnished under any contract or service or intended for sale or
lease, and all goods consigned by Borrower or any Guarantor and all other
items which have previously constituted Equipment but are then currently
being held for sale or lease in the ordinary course of Borrower's or any
Guarantor's business, (iii) raw materials, work-in-process and finished
goods, (iv) materials, components and supplies of any kind, nature or
description used or consumed
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 7
<PAGE>
in Borrower's or any Guarantor's business or in connection with the
manufacture, production, packing, shipping, advertising, finishing or sale
of any of the Property described in clauses (i) through (iii) above, (v)
------- ---
goods in which Borrower or any Guarantor has a joint or other interest to
the extent of Borrower's or any Guarantor's interest therein or right of
any kind (including, without limitation, goods in which Borrower or any
Guarantor has an interest or right as consignee), and (vi) goods that are
returned to or repossessed by Borrower or any Guarantor; in each case
whether in the possession of Borrower or any Guarantor, a bailee, a
consignee, or any other Person for sale, storage, transit, processing, use
or otherwise, and any and all documents relating to any of the foregoing.
"Key Man" Policies - A life insurance policy issued on the life of Max
------------------
W. Batzer in the amount of not less than $1,000,000, and a life insurance
policy issued on the life of Brad A. Hummel in the amount of not less than
$1,000,000.
Lease Default - As defined in Section 6.
-------------
Lien - Any mortgage, deed of trust, pledge, security interest,
----
assignment, encumbrance or lien (statutory or otherwise) of every kind and
character.
Loan Documents - This Agreement, the Notes, the Security Instruments
--------------
and all other documents heretofore, herewith or hereafter executed in
connection with the lending, credit and security transactions described in
this Agreement, including those described in the Prior Agreement.
Loans - Collectively, the Advance Term Loan and the Revolving Loan.
-----
Material Adverse Effect - Any set of circumstances or events that has
-----------------------
a material adverse effect on (i) the assets or properties, liabilities,
financial condition, business, operations, affairs or circumstances of
Borrower and Guarantors, taken as a whole, (ii) the ability of Borrower and
Guarantors to carry out their consolidated business as it exists on the
date of this Agreement or as proposed at the date of this Agreement to be
conducted, (iii) the ability of Borrower to meet its obligations under the
Notes, this Agreement, any of the other Loan Documents or the Subordinated
Debt, in each case on a timely basis, or (iv) the ability of Borrower and
Guarantors, taken as a whole, to meet their obligations under this
Agreement or any of the other Loan Documents.
Maximum Rate - At any particular time in question, the maximum rate of
------------
interest that under applicable law may then be charged on the Notes. If
such maximum rate changes after the date of this Agreement, then the
Maximum Rate shall be automatically increased or decreased, as the case may
be, without notice to Borrower, from time to time as of the effective date
of each change in such maximum rate.
Notes - Collectively, the Advance Term Note and the Revolving Note,
-----
together with all renewals, modifications, amendments and extensions
thereof or any part thereof.
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 8
<PAGE>
Obligations - Any and all obligations of Borrower or any of Guarantors
-----------
for (i) the payment of money, whether principal, interest, fees, costs or
otherwise, and (ii) the performance of agreements, promises, covenants and
acts, in both cases arising under or in connection with this Agreement, the
Notes, any of the Security Instruments or any of the other Loan Documents.
Permitted Liens - The term Permitted Lien shall mean (i) easements,
---------------
rights of way, servitudes, permits, conditions, covenants and other
restrictions, and easements of streets, alleys, highways, pipelines,
telephone lines, power lines, railways and other easements and rights of
way on, over or in respect of any of Borrower's or Guarantors' assets or
properties and that do not, individually or in the aggregate, cause a
Material Adverse Effect; (ii) materialmen's, mechanic's, repairman's,
employee's, warehousemen's, landlord's, carrier's, contractor's, sub-
contractor's, and other Liens (including any financing statements filed in
respect thereof) incidental to the construction, maintenance, development,
transportation, storage or operation of Borrower's or Guarantors' assets or
properties to the extent not delinquent (or which, if delinquent, are being
contested in good faith by appropriate proceedings and for which Borrower
or any Guarantor has set aside on its books adequate reserves in accordance
with GAAP); (iii) all contracts, agreements and instruments (but not any
contract, agreement or instrument that affirmatively or expressly creates a
security interest, except as described in clause (vii) below), and all
defects and irregularities and other matters affecting Borrower's or
Guarantors' assets and properties which were in existence at the time
Borrower's or Guarantors' assets and properties were originally acquired by
Borrower or such Guarantor and all routine operational agreements entered
into in the ordinary course of business, which contracts, agreements,
instruments, defects, irregularities and other matters and routine
operational agreements are not such as to, individually or in the
aggregate, interfere materially with the operation, value or use of
Borrower's and Guarantors' assets and properties, considered in the
aggregate; (iv) liens in connection with worker's compensation,
unemployment insurance or other social security, old age pension or public
liability obligations; (v) legal or equitable encumbrances deemed to exist
by reason of the existence of any litigation or other legal proceeding or
arising out of a judgment or award with respect to which an appeal is being
prosecuted in good faith and levy and execution thereon have been stayed
and continue to be stayed; (vi) rights reserved to or vested in any
municipality, governmental, statutory or other public authority to control
or regulate any of Borrower's or Guarantors' assets and properties in any
manner, and all applicable laws, rules, regulations and orders from any
governmental authority; (vii) purchase money security interests incurred in
the ordinary course of Borrower's or any Guarantor's business in connection
with the acquisition of Equipment (provided that the related indebtedness
shall be subject to Section 12(g)) or Inventory; (viii) Liens created by or
pursuant to this Agreement or the other Security Instruments; (ix) Liens
existing as of November 30, 1998 and disclosed on Schedule 9(j) attached
hereto; and (x) any and all renewals and extensions of all or any of the
foregoing.
Person - An individual, a corporation, a partnership, an association,
------
a trust or any other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 9
<PAGE>
Plan - Any plan subject to Title IV of ERISA and maintained by
----
Borrower or a Guarantor, or any such plan to which Borrower or a Guarantor
is required to contribute on behalf of its employees.
Prime Rate - The "Prime Rate" as announced by Bank at its principal
----------
banking office in Dallas, Texas from time to time, but, for any day, never
less than the Federal Funds Effective Rate in effect for such day plus one-
half of one percent ( 1/2%) per annum. Without notice to Borrower,
Guarantors or any other Person, the Prime Rate shall change automatically
from time to time as and in the amount by which said Prime Rate shall
fluctuate, with each such change to be effective as of the date of each
change in the Prime Rate. The Prime Rate is a reference rate and does not
necessarily represent the lowest or best rate charged to any customer by
Bank.
Prime Rate Interest Period - With respect to any Prime Rate Loan, the
--------------------------
quarterly period ending on the first (1st) day of each February, May,
August and November, provided, however, that (i) if any Prime Rate Interest
-------- -------
Period would end on a day that is not a Business Day, such Prime Rate
Interest Period shall be extended to the next succeeding Business Day, and
(ii) if any Prime Rate Interest Period would otherwise end after the
Advance Term Loan Maturity Date or Revolving Maturity Date, as applicable,
then such Prime Rate Interest Period shall end on the Advance Term Loan
Maturity Date or Revolving Maturity Date, respectively.
Prime Rate Loan - Any Loan, or a portion thereof, during any period
---------------
that bears interest at the Prime Rate plus the Prime Rate Margin, or which
----
would bear interest at such rate if the Maximum Rate ceiling was not in
effect at a particular time. (Although certain Loans under the Prior
Agreement may not have been Prime Rate Loans, all Loans under this
Agreement are Prime Rate Loans.)
Prime Rate Margin - One-quarter of one percent (0.25%) whenever the
-----------------
Funded Debt Ratio is less than or equal to 1.0:1.0; one-half of one percent
(0.50%) whenever the Funded Debt Ratio is greater than 1.0:1.0, but less
than or equal to 2.0:1.0; one percent (1.00%) whenever the Funded Debt
Ratio is greater than 2.0:1.0, but less than or equal to 3.0:1.0; and one
and three-quarters percent (1.75%) whenever the Funded Debt Ratio is
greater than 3.0:1.0.
Prudential - The Prudential Insurance Company of America.
----------
Reporting Default - As defined in Section 6.
-----------------
Revolving Loan - The Loan or Loans made under the Revolving Loan
--------------
Commitment pursuant to Section 2(a).
Revolving Loan Commitment - The commitment contained in Section 2(a)
-------------------------
of this Agreement.
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 10
<PAGE>
Revolving Maturity Date - January 31, 1999.
-----------------------
Revolving Note - That certain revolving note in the stated principal
--------------
amount of $2,000,000 and further described in Section 3(a).
Security Instruments - The term Security Instruments is used
--------------------
collectively herein to mean this Agreement, all security agreements, pledge
agreements and financing statements, the Guaranties and other collateral
documents covering certain of Borrower's and Guarantors' assets and
properties, all such documents in form and substance reasonably
satisfactory to Bank.
Senior Funded Debt Ratio - As of any date, the ratio of (i) Funded
------------------------
Debt as of such date minus Subordinated Debt as of such date to (ii) EBITDA
for the period of the twelve calendar months ending on, or most recently
ended prior to, such date.
Subordinated Debt - The outstanding principal of and accrued interest
-----------------
on the Subordinated Notes, and any other Funded Debt that by its express
terms is junior or subordinate in right of payment in full to the
Obligations.
Subordinated Note Agreement - That certain Note Agreement dated as of
---------------------------
April 16, 1997 between Borrower and Prudential, as, subject to Section
12(u), amended from time to time.
Subordinated Notes - The Notes issued pursuant to the Subordinated
------------------
Note Agreement.
Subsidiary - Any corporation or other Person of which securities or
----------
other ownership interests having ordinary voting power to elect a majority
of the board of directors or other persons performing similar functions are
at the time directly or indirectly owned by Borrower or any Guarantor.
Tax Refund - As defined in Subsection 11(t).
----------
Unleveraged Capital Expenditures - For any period, the total cost of
--------------------------------
capital expenditures in such period by Borrower on a consolidated basis for
the purpose of acquiring, or acquiring the use of, Equipment or other
tangible capital assets, less the total amount of Funded Debt incurred in
connection with such expenditures.
2. COMMITMENTS OF BANK.
(a) Current Commitment
(1) Revolving Loan. On the terms and conditions hereinafter set
--------------
forth, Bank agrees to make a revolving loan consisting of one or more
Advances to Borrower from time to time during the period beginning on
the date of this Agreement and ending on (but not including) the
Revolving Maturity Date in such
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 11
<PAGE>
amounts as Borrower may request up to an amount not to exceed, in the
aggregate principal amount outstanding at any time $1,000,000.
Provided, however, that if a Borrowing Increase Event occurs, Borrower
may request up to an amount not to exceed, in the aggregate principal
amount outstanding at any time, $2,000,000. Within the limit of this
Section 2(a), Borrower may borrow, repay without premium or penalty,
and reborrow. Notwithstanding any other provision of this Agreement,
no Advance shall be required to be made hereunder if any Event of
Default has occurred and is continuing or if any event or condition
has occurred that may, with notice, be an Event of Default.
(2) Procedure for Borrowing Under Revolving Loan Commitment.
-------------------------------------------------------
Whenever Borrower desires an Advance under the Revolving Loan, it
shall give Bank telegraphic, facsimile, telex or telephonic notice (an
"Advance Request") of such requested Advance, which in the case of
telephonic notice, shall be promptly confirmed in writing. Each
Advance Request for an Advance under the Revolving Loan shall be in
the form of Exhibit "A" attached hereto. Each Advance Request shall
be executed by the President, Chief Executive Officer or Chief
Financial Officer of Borrower and shall be received by Bank not later
than 11:00 a.m. Dallas, Texas time, on the Borrowing Date. Each
Advance Request shall specify the Borrowing Date, and the principal
amount to be borrowed (which shall not be less than $100,000).
(3) Voluntary Reduction of Revolving Loan Commitment. Borrower
------------------------------------------------
may at any time, or from time to time, upon not less than three (3)
Business Days prior written notice to Bank, reduce or terminate the
Revolving Loan Commitment; provided, however, that each reduction in
-------- -------
the Revolving Loan Commitment must (i) be in a minimum amount of at
least $100,000, and (ii) be accompanied by a prepayment of the
Revolving Note in at least the amount by which the then-outstanding
principal balance of the Revolving Note exceeds the Revolving Loan
Commitment as reduced in accordance with this Section 2(a)(3).
(b) Expired Commitment. Borrower currently has outstanding Advances of
$7,952,930.10 in the aggregate principal amount under the Prior Agreement.
Borrower hereby confirms and acknowledges that the Advance Term Loan
Commitment under the Prior Agreement is and has been extinguished, and that
Bank does not have any obligations whatsoever to make available to Borrower
any further Advances under the Advance Term Loan. Notwithstanding, all
Advances made by Bank to Borrower pursuant to the Advance Term Loan
Commitment contained in the Prior Agreement remain subject to all of the
provisions contained in this Agreement.
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 12
<PAGE>
3. NOTES EVIDENCING LOANS.
(a) The facilities described above in Section 2 shall be evidenced by
two promissory notes of Borrower as follows:
(i) Form of Advance Term Note - The Advance Term Loan shall be
-------------------------
evidenced by an amended and restated note in the stated or face amount
of $7,952,930.10, and shall be in the form of Exhibit "B" hereto with
appropriate insertion. Notwithstanding the principal amount of the
Advance Term Note, as stated on the face thereof, the actual principal
amount due from Borrower to Bank on account of the Advance Term Note,
as of any date of computation, shall be the sum of Advance Term Loan
Advances then and theretofore made on account thereof, less all
principal payments actually received by Bank in collected funds with
respect thereto. Although the Advance Term Note shall be dated as of
the date of this Agreement, interest in respect thereof shall be
payable for the period during which the Advance Term Loan Advances
evidenced thereby are outstanding and, although the face amount of the
Advance Term Note may be higher, the Advance Term Note shall be
enforceable, with respect to Borrower's obligation to pay the
principal amount thereof, only to the extent of the unpaid principal
amount of such Advance Term Loan Advances.
(ii) Form of Revolving Note - The Revolving Loan shall be
----------------------
evidenced by a note in the face amount of $2,000,000, and shall be in
the form of Exhibit "C" hereto with appropriate insertion.
Notwithstanding the principal amount of the Revolving Note, as stated
on the face thereof, the actual principal amount due from Borrower to
Bank on account of the Revolving Note, as of any date of computation,
shall be the sum of Revolving Loan Advances then and theretofore made
on account thereof, less all principal payments actually received by
Bank in collected funds with respect thereto. Although the Revolving
Note shall be dated as of the date of this Agreement, interest in
respect thereof shall be payable for the period during which the
Revolving Loan Advances evidenced thereby are outstanding and,
although the face amount of the Revolving Note may be higher, the
Revolving Note shall be enforceable, with respect to Borrower's
obligation to pay the principal amount thereof, only to the extent of
the unpaid principal amount of such Revolving Loan Advances.
(b) Interest Rates - The unpaid principal balances of the Notes
--------------
shall bear interest from time to time as set forth in Section 4.
(c) Payment of Interest on Advance Term Note - Interest on the
----------------------------------------
Advance Term Note shall be payable quarterly, in arrears, on each Interest
Payment Date and on the Advance Term Loan Maturity Date.
(d) Payment of Principal of Advance Term Loan - The principal of the
-----------------------------------------
Advance Term Loan shall be payable as follows:
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 13
<PAGE>
(i) Borrower shall make quarterly principal payments of $400,000
each, the first such payment to be due and payable on the fifteenth
(15th) day of July, 1999, and continuing on the fifteenth (15th) day
of each October, January, April and July thereafter; and
(ii) Borrower shall make one (1) final payment equal to the
entire outstanding principal balance of the Advance Term Loan, which
final payment shall be due and payable on the Advance Term Loan
Maturity Date.
(e) Payment of Interest on Revolving Note - Interest on the
-------------------------------------
Revolving Note shall be payable quarterly, in arrears, on each Interest
Payment Date and on the Revolving Maturity Date.
(f) Payment of Principal of Revolving Loan - Principal of the
--------------------------------------
Revolving Note shall be due and payable on the Revolving Maturity Date.
4. INTEREST RATES FOR LOANS.
(a) Calculation. With respect to the unpaid principal amount of a
-----------
Prime Rate Loan, Borrower agrees to pay interest on the Advance Term Note
or the Revolving Note, as the case may be, calculated on the basis of the
actual days elapsed (including the first day but excluding the last day) in
a year consisting of 360 days (unless such calculation would result in a
usurious rate, in which case interest shall be calculated on the basis of a
year or 365 or 366 days, as the case may be) from the date the proceeds
thereof are or were made available to Borrower until maturity (whether by
acceleration or otherwise), at a varying rate per annum equal to the lesser
of (i) the Maximum Rate, or (ii) the Prime Rate plus the Prime Rate Margin.
----
Past due principal and, to the extent permitted by law, past due interest
in respect to a Prime Rate Loan shall bear interest, payable on demand, at
a rate per annum equal to the Prime Rate plus four percent (4%).
----
(b) Recoupment. If at any time the applicable rate of interest
----------
pursuant to Section 4(a) above shall exceed the Maximum Rate, thereby
causing the interest on one or more of the Notes to be limited to the
Maximum Rate, then any subsequent reduction in the interest rate shall not
reduce the rate of interest on such Notes below the Maximum Rate until the
total amount of interest accrued on such Notes equals the amount of
interest that would have accrued on the Note if the rate pursuant to
Section 4(a) had at all times been in effect.
5. COLLATERAL SECURITY AND GUARANTIES. Borrower and each Guarantor hereby
confirm and acknowledge that the Liens previously granted to Bank in connection
with the Prior Agreement, to secure the performance of their obligations
thereunder, also secure the Obligations, whether now or hereafter incurred,
matured or unmatured, direct or contingent, joint or several, or joint and
several, including extensions, modifications and renewals thereof, and
substitutions therefor, and as such remain in force and full effect.
Additionally, Borrower acknowledges that in connection with the Prior Agreement
there has been pledged and delivered to Bank one hundred percent (100%) of the
issued and outstanding shares of the capital stock of
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 14
<PAGE>
each Guarantor. Borrower and each Guarantor hereby confirm that each such pledge
secures the Obligations, whether now or hereafter incurred, matured or
unmatured, direct or contingent, joint or several, or joint and several,
including extensions, modifications and renewals thereof, and substitutions
therefor, and as such remain in force and full effect. All collateral in which
Borrower or any Guarantor has herewith granted or hereafter grants to Bank a
Lien (to the satisfaction of Bank) in accordance with this Section 5, as such
properties and interests are from time to time constituted, are hereinafter
collectively called the "Collateral." Bank's Lien on the Collateral shall be a
first and prior Lien, subject only to such priority as may be afforded a
Permitted Lien under applicable law.
In addition to the grant of Liens against the Collateral in favor of Bank,
Guarantors acknowledge the execution and delivery of the Guaranties to Bank in
connection with the Prior Agreement and confirm that the Guaranties apply to the
Obligations to the same extent as they applied to the "Obligations" under and as
defined in the Prior Agreement. Without limiting the foregoing, each Guarantor
hereby acknowledges and consents to this Loan Agreement and (a) acknowledges
that its obligations under that certain Guaranty dated on or before the date of
this Agreement in favor of Bank includes a guaranty of all of the obligations,
indebtedness and liabilities of Borrower under (i) this Agreement and (ii) the
Notes, (b) represents to Bank that such Guaranty remains in full force and
effect, and (c) agrees that this Agreement and all documents executed in
connection herewith do not operate to reduce or discharge its obligations under
such Guaranty.
6. WAIVER OF REPORTING, FINANCIAL COVENANT AND OTHER DEFAULTS. Borrower
and Guarantors acknowledge that (a) as of October 31, 1998, Borrower did not
comply with the financial and reporting covenants ("Financial Covenant Default"
and "Reporting Default," respectively) set forth in Sections 11, 12 and 13,
respectively, of the Prior Agreement and (b) as previously disclosed to Bank in
writing, on the date hereof, Borrower and Guarantors are in default of payment
in the approximate aggregate principal amount of $1,223,294, under capitalized
leases ("Lease Defaults"), which capital leases are in the approximate aggregate
principal amount of $14,582,251. As a result, as of November 30, 1998 and the
date hereof, Events of Default (as defined in the Prior Agreement) existed and
continue to exist under the Prior Agreement.
Pursuant to this Section 6, Bank waives all Financial Covenant Defaults,
Reporting Defaults and Events of Default extant on November 30, 1998 and
previously disclosed to Bank in writing. In addition, Bank waives all Lease
Defaults extant as of the date hereof and previously disclosed to Bank in
writing. Bank's waiver of Lease Defaults is subject to the condition subsequent
that all Lease Defaults are cured by 5:00 p.m. central standard time on January
15, 1999. Borrower must submit to Bank by 5:00 p.m. central standard time on
January 15, 1999 evidence of such cure, which evidence must be acceptable to
Bank in its sole discretion ("Cure Evidence"). In the absence of Bank's
receipt of Cure Evidence, an Event of Default hereunder will exist. This waiver
is with respect to the foregoing defaults only, and does not create any
obligation on Bank's part to grant any similar waivers or extensions under
similar or dissimilar circumstances. Without limiting the foregoing, any Events
of Default arising after November 30, 1998 (other than those described in the
immediately preceding paragraph) are not waived by this Section 6. This waiver
shall become effective only upon Borrower's and Guarantors' execution of this
Agreement. It is understood and
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 15
<PAGE>
agreed that, except as set forth in this Section 6, Bank waives no rights
---------
whatsoever with respect to remedies available to it with respect to this
- ----------
Agreement and the other Loan Documents.
Borrower and Guarantors (a) represent and warrant that no Event of Default
as defined in the Prior Agreement (or any event that would, with the giving of
notice or passage of time, or both, would constitute an Event of Default) has
occurred and is continuing under the Prior Loan Agreement or the other Loan
Documents, other than those described in this Section 6; and (b) represent and
agree that Borrower and Guarantors in no way expect, have been led to expect, or
will rely upon any other waiver, extension, forbearance or consent not agreed to
by Bank in writing in this Section 6 or prior to the date of this Agreement.
7. FEES. Borrower shall pay to Bank a commitment fee on the daily average
unused amount of Bank's Revolving Loan Commitment ("Commitment Fee") for the
period from and including the date hereof to but not including the Revolving
Maturity Date, at a rate per annum of (a) one-quarter of one percent (0.25%)
whenever the Funded Debt Ratio is less than or equal to 2.0:1.0, (b) three-
eighths of one percent (0.375%) whenever the Funded Debt Ratio is greater than
2.0:1.0 and less than or equal to 3.0:1.0 and (c) one-half of one percent
(0.50%) whenever the Funded Debt Ratio is greater than 3.0:1.0.
Accrued Commitment Fees (together with any accrued and unpaid Commitment
Fees under the Prior Agreement) shall be payable quarterly in arrears on the
first day of each February, May, August and November with respect to the
preceding quarter and on the Revolving Maturity Date.
8. PREPAYMENTS.
(a) Voluntary Prepayments. Borrower may at any time and from time
---------------------
to time, without penalty or premium, prepay any of the Notes, in whole or
in part. Each prepayment of the Advance Term Note shall be made on at least
one (1) Business Day's notice to Bank and shall be in a minimum amount of
$100,000 or the unpaid balance of the Advance Term Note, whichever is less,
and shall be applied to amounts of outstanding principal, in reverse order
of maturity.
(b) Mandatory Prepayment of Advance Term Loan. On or before April
-----------------------------------------
15 of each year, beginning April 15, 1999, Borrower shall make a mandatory
prepayment of the Advance Term Loan in an amount equal to fifty percent
(50%) of Excess Cash Flow attributable to Borrower's immediately preceding
fiscal year, calculated on the basis of the annual audited consolidated
financial statements for such fiscal year delivered pursuant to Section
11(a)(i). All such prepayments of the Advance Term Loan shall be
accompanied with accrued interest to the date of prepayment on the amount
so prepaid and shall be applied to the installments due thereunder in the
inverse order of maturity. Concurrently with the making of any such
payment, Borrower shall deliver to Bank a certificate in the form of
Exhibit "D" attached hereto demonstrating its calculation of the amount
required to be paid.
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 16
<PAGE>
(c) Tax Refund as Prepayment. Borrower shall make a mandatory
------------------------
prepayment in the amount of its Tax Refund. This prepayment shall be
applied by Bank to the Revolving Note or the Advance Term Note in its sole
discretion. If Bank chooses to apply the Tax Refund as a prepayment of the
Advance Term Note, such prepayment shall be applied in inverse order of
installment maturity.
9. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to enter into
this Agreement, Borrower and, to the extent applicable, each Guarantor hereby
represents and warrants to Bank (which representations and warranties will
survive the execution and delivery of this Agreement and the Notes) that:
(a) Existence. Each of Borrower and Guarantors is a corporation duly
---------
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and is duly qualified to conduct business
in all jurisdictions wherein the failure to qualify could result in a
Material Adverse Effect.
(b) Power and Authorization. Borrower is duly authorized and
-----------------------
empowered to create and issue the Notes; and Borrower and Guarantors are
duly authorized and empowered to execute, deliver and perform this
Agreement and the other Loan Documents to which each is a party; and all
action on Borrower's and Guarantors' part requisite for the due creation
and issuance of the Notes and for the due execution, delivery and
performance of the other Loan Documents, including this Agreement, has been
duly and effectively taken.
(c) Binding Obligations. This Agreement does, and the Notes and
-------------------
other Loan Documents upon their creation, issuance, execution and delivery
will, constitute valid and binding obligations of Borrower and Guarantors,
as the case may be, enforceable in accordance with their terms (except that
enforcement may be subject to any applicable bankruptcy, insolvency, or
similar debtor relief laws now or hereafter in effect and relating to or
affecting the enforcement of creditors rights generally, and to general
principles of equity).
(d) No Legal Bar or Resultant Lien. The Notes and the other Loan
------------------------------
Documents, including this Agreement, do not and will not violate any
provisions of any contract, agreement, law, regulation, order, injunction,
judgment, decree or writ to which Borrower or any Guarantor is subject, or
result in the creation or imposition of any Lien upon any assets or
properties of Borrower or any Guarantor, other than those contemplated by
this Agreement.
(e) No Consent. The execution, delivery and performance by Borrower
----------
and Guarantors of the Notes and the other Loan Documents, including this
Agreement, does not require the consent or approval of any other Person,
including without limitation any regulatory authority or governmental body
of the United States or any state thereof or any political subdivision of
the United States or any state thereof (except for consents which have been
obtained by Borrower or such Guarantor as to which such consent may be
applicable).
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 17
<PAGE>
(f) Financial Condition. The consolidated balance sheets of
-------------------
Borrower and its consolidated Subsidiaries as at December 31, 1997 and the
related consolidated statements of income and of cash flows for the fiscal
year ended on such date, reported on by Simonton, Kutac & Barnidge, L.L.P.,
copies of which have heretofore been furnished to Bank, present fairly the
consolidated financial condition of Borrower and its consolidated
Subsidiaries as at such dates, and the consolidated results of their
operations and cash flows for the fiscal year then ended. The unaudited
consolidated balance sheet of Borrower and its consolidated Subsidiaries as
at September 30, 1998, and the related unaudited consolidated statements of
income and of cash flows for the nine-month period ended on such date,
copies of which have heretofore been filed with the Securities and Exchange
Commission and furnished to Bank (in the case of all such statements),
present fairly the consolidated financial condition of Borrower and its
consolidated Subsidiaries as at such respective dates, and the consolidated
results of their operations and changes in cash flows for the nine-month
period then ended (subject to normal year-end audit adjustments). All such
financial statements, including the related schedules and notes thereto,
have been prepared in accordance with GAAP applied consistently throughout
the periods involved (except as approved by such accountants, and as
disclosed therein and except that the quarterly statements and the
statements as at September 30, 1998 and for the nine-month period then
ended are unaudited and do not include footnotes as would be required for
audited financial statements). Neither Borrower nor any of its Subsidiaries
had, at the date of the most recent balance sheet referred to above, any
guarantee obligation, contingent liability or liability for taxes, or any
long-term lease or any interest rate or foreign currency swap of exchange
transaction, that is not reflected in the foregoing statements or in the
notes thereto and which, in the aggregate, would be material to Borrower
and Guarantors, taken as a whole, except as set forth on Schedule 9(f).
Since December 31, 1997, no change has occurred in the condition, financial
or otherwise, of Borrower or a Subsidiary thereof that could have a
Material Adverse Effect, except as set forth in Schedule 9(f).
(g) Liabilities. As of the date of this Agreement, neither Borrower
-----------
nor any Guarantor has any material (individually or in the aggregate)
liability, direct or contingent, except as disclosed in the financial
statements referenced in Section 9(f) or on Schedule 9(g) attached hereto.
No unusual or unduly burdensome restrictions, restraint, or hazard exists
by contract, law or governmental regulation or otherwise relative to the
business, assets or properties of Borrower or any Guarantor that could have
a Material Adverse Effect.
(h) Litigation. Except as described in Borrower's annual audited
----------
consolidated financial statements, or as otherwise disclosed to Bank in
Schedule 9(h) attached hereto, there is no litigation, legal or
administrative proceeding, investigation or other action of any nature
pending or, to the knowledge of Borrower, threatened against or affecting
Borrower or any Guarantor that could have a Material Adverse Effect.
(i) Taxes; Governmental Charges. Borrower and each Guarantor have
---------------------------
filed all tax returns and reports required to be filed and have paid all
taxes, assessments, fees
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 18
<PAGE>
and other governmental charges levied upon them or their assets, properties
or income which are due and payable, including interest and penalties, the
failure of which to pay could have a Material Adverse Effect, except such
as are being contested in good faith by appropriate proceedings and for
which adequate reserves for the payment thereof as required by GAAP have
been provided and with respect to which levy and execution thereon have
been stayed and continue to be stayed.
(j) Titles, Liens. Borrower and each Guarantor have good and
-------------
marketable title to all of their assets and properties, free and clear of
all Liens or other encumbrances except Permitted Liens, including, without
limitation, those Permitted Liens identified on Schedule 9(j).
(k) Defaults. Except for those defaults being waived pursuant to
--------
Section 6 of this Agreement, neither Borrower nor any Guarantor is in
default and no event or circumstance has occurred that, but for the passage
of time or the giving of notice, or both, would constitute a default under
any loan or credit agreement, indenture, mortgage, deed of trust, security
agreement or other agreement or instrument to which Borrower or any
Guarantor is a party that could in any respect have a Material Adverse
Effect. No Event of Default hereunder has occurred and is continuing.
(l) Casualties; Taking of Properties. After the date of the most
--------------------------------
recent consolidated financial statements of Borrower delivered to Bank,
neither the business nor the assets or properties of Borrower or any
Guarantor have been affected (to the extent the same could cause a Material
Adverse Effect) as a result of any fire, explosion, earthquake, flood,
drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of property or cancellation of contracts, permits or
concessions by any domestic or foreign government or any agency thereof,
riot, activities of armed forces or acts of God or of any public enemy.
(m) Use of Proceeds; Margin Stock. Subject to the terms and
-----------------------------
conditions hereof, Borrower will use the proceeds of the Revolving Loan
solely for working capital. Neither Borrower nor any Guarantor is engaged
principally or as one of its important activities in the business of
extending credit for the purpose of purchasing or carrying any "margin
stock" as defined in Regulation U of the Board of Governors of the Federal
Reserve System (12 C.F.R. Part 221), or for the purpose of reducing or
retiring any indebtedness that was originally incurred to purchase or carry
a margin stock or for any other purpose which might constitute this
transaction a "purpose credit" within the meaning of said Regulation U.
(n) Location of Business and Offices. The principal place of
--------------------------------
business of Borrower is located at 2777 Stemmons Freeway, Suite 1525,
Dallas, Texas 75207. All names (including prior corporate names and past
and present trade names) used by any of Borrower and Guarantors during the
past five years (expressly including any such names used by a predecessor
to Borrower or a Guarantor, or used by a Guarantor prior to its becoming a
Subsidiary) are set forth on Schedule 9(n). The locations of business at
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 19
<PAGE>
which any such names were used during such five years, or presently, is
also set forth on Schedule 9(n).
(o) Compliance with Law. Neither Borrower nor any Guarantor:
-------------------
(i) is in violation of any law, judgment, decree, order,
ordinance, or governmental rule or regulation to which Borrower, any
Guarantor, or any of its or their assets or properties is subject; and
(ii) has failed to obtain any license, permit, franchise or other
governmental authorization necessary to the ownership of any of its
assets or properties or the conduct of business;
which violation or failure could have a Material Adverse Effect.
(p) No Material Misstatements. No information, exhibit or report
-------------------------
furnished by Borrower to Bank or its counsel in connection with this
Agreement contains any material misstatement of fact or omits to state a
material fact or any fact necessary to make the statement contained therein
not materially misleading.
(q) ERISA. Borrower and each Guarantor are in compliance in all
-----
material respects with the applicable provisions of ERISA, and no
"reportable event," as such term is defined in Section 4043 of ERISA, has
occurred with respect to any Plan of Borrower or any Guarantor that could
cause a Material Adverse Effect.
(r) Subsidiaries. Borrower has no Subsidiaries other than
------------
Guarantors. The corporate name, federal tax identification number, state
of incorporation and states of qualification to do business as a foreign
corporation, location of principal place of business or chief executive
office, number of authorized and issued and outstanding shares of capital
stock (and their record and beneficial holder or holders) of each Guarantor
are disclosed on Schedule 9(r).
(s) Environmental Matters. Except as disclosed on Schedule 9(s),
---------------------
neither Borrower nor any Guarantor has received notice or otherwise has
knowledge of (i) any Environmental Liability that could individually or in
the aggregate have a Material Adverse Effect arising in connection with (A)
any non-compliance with or violation of the requirements of any
Environmental Law or (B) the release or threatened release of any toxic or
hazardous waste into the environment, (ii) any threatened or actual
liability in connection with the release or threatened release of any toxic
or hazardous waste into the environment which could individually or in the
aggregate have a Material Adverse Effect or (iii) any federal or state
investigation evaluating whether any remedial action is needed to respond
to a release or threatened release of any toxic or hazardous waste into the
environment for which Borrower or any Guarantor is or may be liable.
(t) Ownership. Both as of November 30, 1998 and as of the date of
---------
this Agreement, Brad A. Hummel owned and owns the number of shares, and
options
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 20
<PAGE>
exercisable for shares, of capital stock of Borrower set forth opposite his
name on Schedule 9(t). As of November 30, 1998, the authorized capital
stock of Borrower consisted of 50,000,000 shares of common stock and
10,000,000 shares of preferred stock, of which 11,424,083 shares of common
stock, and 695,593 shares of preferred stock, were issued and outstanding.
As of November 30, 1998, approximately 1,916,251 shares of common stock
were reserved for issuance upon the exercise of previously granted stock
options or warrants.
(u) Investments and Guaranties. Neither Borrower nor any Guarantor
--------------------------
has made any investment in, advances to or guaranties of the obligations of
any Person (other than Borrower or a Guarantor that is a wholly-owned
Subsidiary of Borrower), except as reflected in its financial statements
previously delivered to Bank or as otherwise disclosed in writing to Bank.
(v) Year 2000. Any reprogramming required to permit the proper
---------
functioning, in and following the year 2000, of (i) Borrower's and
Guarantors' computer systems and (ii) equipment containing embedded
microchips (including systems and equipment supplied by others or with
which Borrower's and Guarantors' systems interface) and the testing of all
such systems and equipment, as so reprogrammed, will be completed by June
30, 1999. The cost to Borrower and Guarantors of such reprogramming and
testing and of the reasonably foreseeable consequences of year 2000 to
Borrower and Guarantors (including, without limitation, reprogramming
errors and the failure of others' systems or equipment) will not result in
a Default or a Material Adverse Effect. Except for such of the
reprogramming referred to in the preceding sentence as may be necessary,
the computer and management information systems of Borrower and Guarantors
are and, with ordinary course upgrading and maintenance, will continue for
the term of this Agreement to be, sufficient to permit Borrower and
Guarantors to conduct their business without Material Adverse Effect.
10. CONDITIONS OF LENDING.
(a) The obligation of Bank to make the initial Advance under the
Revolving Loan shall be subject to the following conditions precedent:
(i) Asset Audit. Bank shall have received an asset audit of
-----------
Borrower, based on financial statements current as of September 30,
1998, with such asset audit prepared in accordance with GAAP and
acceptable to Bank;
(ii) Waiver of Defaults by Holders of Subordinated Debt.
--------------------------------------------------
Borrower and Bank shall have received in writing a waiver from
Prudential waiving any and all known defaults of Borrower and
Guarantors, including, but not limited to, those defaults which
correspond to those waived in Section 6 hereof, arising under the
Subordinated Note Agreement and any other agreement between or among
Borrower and Prudential or between or among them and/or their
affiliates;
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 21
<PAGE>
(iii) Amendment to Subordinated Note Agreement. Borrower shall
----------------------------------------
have caused the Subordinated Note Agreement and any other agreement
between or among Borrower and Prudential or between or among them
and/or their affiliates to be amended so that the terms thereof are in
form and substance satisfactory to Bank in its sole discretion,
including, without limitation so that the covenants therein are
consistent with the covenants herein, as consistency shall be
determined by Bank in its sole discretion. Borrower shall have
delivered to Bank a fully executed copy of the Subordinated Note
Agreement, which shall be effective, and any other agreement between
or among Borrower and Prudential or between or among them and/or their
affiliates, in each case as amended.
(iv) Execution and Delivery. Borrower shall have executed and
----------------------
delivered to Bank the Notes and the other Loan Documents required to
be executed by Borrower and all other required documents, all in form
and substance satisfactory to Bank;
(v) Landlord's Subordinations. To the extent not previously
-------------------------
delivered, Bank shall have received by January 31, 1999, from each
landlord of Borrower and each Guarantor an executed landlord's
subordination or waiver agreement in form and content satisfactory to
Bank;
(vi) Legal Opinion. Bank shall have received from Greenberg
-------------
Traurig, Borrower's and Guarantors' legal counsel, a favorable legal
opinion in form and substance satisfactory to Bank (i) as to the
matters set forth in Subsections 9(a), (b), (c), (d), (e), (h) and (k)
(to counsel's knowledge) and (ii) as to such other matters as Bank or
its counsel shall reasonably request;
(vii) Secretary's Certificate. Bank shall have received a
-----------------------
Secretary's Certificate from the secretary or assistant secretary of
Borrower and each Guarantor certifying and attaching appropriate
corporate resolutions regarding the transactions contemplated hereby
and statements of incumbency;
(viii) Good Standing and Existence. Bank shall have received
---------------------------
evidence satisfactory to it of the existence and good standing of
Borrower and each Guarantor (including, without limitation, in
jurisdictions other than their respective jurisdictions of
incorporation);
(ix) Articles and Bylaws. Bank shall have received from
-------------------
Borrower and each Guarantor certified copies of their Articles or
Certificate of Incorporation and Bylaws, or, in the alternative,
Borrower may deliver to Bank a certificate, dated as of even date
herewith, and signed by an authorized officer of Borrower on its
behalf that there have been no changes to Borrower's and Guarantors'
Articles or Certificate of Incorporation and Bylaws since July 23,
1996 (or, as to any Guarantor that became such subsequent to July 23,
1996, since the most recent date thereafter for which a similar
certification was made to Bank);
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 22
<PAGE>
(x) Priority of Liens. Bank shall have received satisfactory
-----------------
evidence that the Liens granted to Bank in the Security Instruments
covering the Collateral constitute perfected, first priority Liens,
subject only to Permitted Liens;
(xi) UCC Searches. Bank shall have received Uniform
------------
Commercial Code searches covering Borrower, Guarantors and the
Collateral, the results of which searches shall be satisfactory to
Bank;
(xii) Fees. Borrower shall have paid Bank all accrued
----
Commitment Fees, and Borrower shall have paid all accrued fees and
expenses of Locke Purnell Rain Harrell (A Professional Corporation).
(xiii) Insurance. Borrower shall have provided evidence of its
---------
insurance of such types and in such amounts as is satisfactory to
Bank; and
(xiv) Legal Matters Satisfactory. All legal matters incident
--------------------------
to the consummation of the transactions contemplated hereby shall be
reasonably satisfactory to special counsel for Bank retained at the
expense of Borrower.
(b) The obligation of Bank to make any subsequent Advance on the
Revolving Loan shall be subject to the following additional conditions
precedent that, at the date of making each such Advance and after giving
effect thereto:
(i) Representations and Warranties. With respect to any
------------------------------
Advance, the representations and warranties of Borrower and Guarantors
under this Agreement are true and correct in all material respects as
of such date, as if then made (except to the extent that such
representations and warranties related solely to an earlier date);
(ii) No Event of Default. No Event of Default shall have
-------------------
occurred and be continuing nor shall any event have occurred or failed
to occur which, with the passage of time or service of notice, or
both, would constitute an Event of Default; and
(iii) Senior Debt. Notwithstanding any provision in any Loan
-----------
Document to the contrary, Bank shall have no obligation to make loans
or Advances pursuant to Section 2 of this Agreement unless the same
shall constitute Senior Debt (as defined in the Subordinated Note
Agreement).
11. AFFIRMATIVE COVENANTS. Borrower and, to the extent applicable, each
Guarantor will at all times comply with the covenants contained in this Section
11 from the date of this Agreement and for so long as any part of the Loans are
in existence.
(a) Financial Statements and Reports. Borrower shall promptly
--------------------------------
furnish to Bank from time to time upon request such information regarding
the business and affairs
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 23
<PAGE>
and financial condition of any of Borrower and Guarantors, as Bank may
reasonably request, and will furnish to Bank:
(i) Annual Financial Statements - as soon as available, and in
---------------------------
any event within ninety (90) days after the end of each fiscal year of
Borrower, beginning with the fiscal year ending December 31, 1998, a
copy of the annual audit report of Borrower and its consolidated
Subsidiaries for such fiscal year containing, on a consolidated and
consolidating basis, balance sheets and statements of income, retained
earnings, and cash flows as at the end of such fiscal year and for the
12-month period then ended, in each case setting forth in comparative
form the figures for the preceding fiscal year, all in reasonable
detail and audited by, and accompanied by the unqualified opinion of,
an accounting firm acceptable to Bank, to the effect that such report
has been prepared in accordance with GAAP and presents fairly the
financial condition and results of operations of Borrower and its
consolidated Subsidiaries as of the dates and for the periods
presented;
(ii) Quarterly Financial Statements - as soon as available, and
------------------------------
in any event within forty-five (45) days after the end of each fiscal
quarter, a copy of an unaudited financial report of Borrower and its
consolidated Subsidiaries as of the end of such fiscal quarter and for
the portion of the fiscal year then ended, containing, on a
consolidated and consolidating basis, balance sheets and statements of
income, and cash flows, in each case setting forth in comparative form
the figures for the corresponding period of the preceding fiscal year,
all in reasonable detail and prepared in accordance with GAAP to
fairly and accurately present (subject to year-end audit adjustments
and disclosures) the financial condition and results of operations of
Borrower and its consolidated Subsidiaries, on a consolidated and
consolidating basis, at the date and for the periods indicated
therein;
(iii) Monthly Financial Statements - as soon as available, and in
----------------------------
any event within forty-five (45) days after the end of each calendar
month (other than the last calendar month in a fiscal quarter), a copy
of an unaudited financial report of Borrower and its consolidated
Subsidiaries as of the end of such month and for the portion of the
fiscal year then ended, containing, on a consolidated basis for each
of Borrower and such Subsidiaries, balance sheets and statements of
income, and cash flows, in each case setting forth in comparative form
the figures for the corresponding period of the preceding fiscal year,
all in reasonable detail and prepared in accordance with GAAP to
fairly and accurately present (subject to year-end audit adjustments
and disclosures) the financial condition and results of operations of
Borrower and its consolidated Subsidiaries, on a consolidated and
consolidating basis, at the date and for the periods indicated
therein;
(iv) SEC/Exchange Filings - as soon as available, copies of all
--------------------
registration statements and regular periodic reports, if any, that
Borrower shall have filed with the Securities and Exchange Commission
(or any successor
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 24
<PAGE>
agency), any securities exchange or any automated trading system
maintained by the National Association of Securities Dealers, Inc.;
(v) Borrowing Base Certificate - as soon as available, and in
--------------------------
any event within forty-five (45) days of the end of each month and
forty-five (45) days of the end of each fiscal quarter, an accurately
completed Borrowing Base Certificate and an Accounts aging report,
each as of the end of such month or fiscal quarter, as applicable;
(vi) Stockholder Information - promptly upon the mailing
-----------------------
thereof to the stockholders of Borrower generally, copies of all
financial statements, reports, notices, correspondence and proxy and
information statements so mailed;
(vii) Management Letters - promptly following delivery thereof
------------------
to Borrower, or the board of directors or management of Borrower, a
copy of any management letter or report by independent public
accountants with respect to the financial condition, operations,
business or prospects of Borrower and its Subsidiaries; and
(viii) Additional Information - (A) Contemporaneously with
----------------------
delivery ofthe same to holders of the Subordinated Notes, any reports
or notices delivered by Borrower pursuant to the Subordinated Note
Agreement, and (B) promptly upon request of Bank from time to time any
additional financial information or other information that Bank may
reasonably request.
All such information, reports, balance sheets and financial statements
referred to in Subsection 11(a) above shall be in such detail as Bank may
reasonably request. All accounting terms used herein shall be interpreted,
and all financial statements and certificates and reports as to financial
matters required to be delivered to Bank hereunder shall be prepared, in
accordance with GAAP applied on a basis consistent with (i.e., without any
change in, or other modification of accounting principles without the prior
written consent of Bank) those used in the preparation of the most recent
financial statements furnished to Bank by Borrower.
(b) Certificates of Compliance. Contemporaneously with the delivery
--------------------------
of the information required by Sections 11(a)(i), (ii) and (iii), Borrower
will furnish or cause to be furnished to Bank a certificate in the form of
Exhibit "D" attached hereto, signed by any of the President, Chief
Executive Officer or Chief Financial Officer of Borrower on behalf of
Borrower (i) stating that Borrower and Guarantors have fulfilled in all
material respects their obligations under this Agreement, the Notes, the
Security Instruments and all other Loan Documents and that all
representations and warranties made herein and therein continue (except to
the extent they relate solely to an earlier date) to be true and correct in
all material respects (or specifying the nature of any change), or if an
Event of Default has occurred, specifying the Event of Default and the
nature and status thereof; (ii) to the extent requested from time to time
by Bank, specifically affirming compliance of Borrower and Guarantors, as
applicable, in all material respects with any of their
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 25
<PAGE>
representations (except to the extent they relate solely to an earlier
date) or obligations under said instruments; (iii) for certificates
delivered in respect of a quarterly period, setting forth the computation,
in reasonable detail as of the end of such quarterly period, of compliance
with Sections 12(c), (d) and (e); and (iv) containing or accompanied by
such financial or other details, information and material as Bank may
reasonably request to evidence such compliance.
(c) Accountants' Certificate. Concurrently with the furnishing of the
------------------------
annual audited financial statements pursuant to Section 11(a)(i), Borrower
will furnish a statement from the firm of independent public accountants
which prepared such statements to the effect that nothing has come to their
attention to cause them to believe that there existed on the date of such
statements any Event of Default.
(d) Taxes and Other Liens. Borrower and each Guarantor will pay and
---------------------
discharge promptly when due all taxes, assessments and governmental charges
or levies imposed upon Borrower or any Guarantor or upon the income or any
assets or property of Borrower or any Guarantor as well as all claims of
any kind (including claims for labor, materials, supplies and rent) that,
if unpaid, might become a Lien or other encumbrance upon any or all of the
assets or property of Borrower or any Guarantor and which could result in a
Material Adverse Effect; provided, however, that neither Borrower nor any
Guarantor shall be required to pay any such tax, assessment, charge, levy
or claim if the amount, applicability or validity thereof shall currently
be contested in good faith by appropriate proceedings diligently conducted,
levy and execution thereon have been stayed and continue to be stayed, and
Borrower or such Guarantor shall have set up adequate reserves therefor, if
required, under GAAP.
(e) Compliance with Laws. Borrower and each Guarantor will observe
--------------------
and comply, in all material respects, with all applicable laws, statutes,
codes, acts, ordinances, orders, judgments, decrees, injunctions, rules,
regulations, orders and restrictions relating to environmental standards or
controls or to energy regulations of all federal, state, county, municipal
and other governments, departments, commissions, boards, agencies, courts,
authorities, officials and officers, domestic or foreign.
(f) Further Assurances. Borrower will cure promptly any defects in
------------------
the creation and issuance of the Notes and the execution and delivery of
the Notes and Borrower and Guarantor will cure promptly any defects in the
execution and delivery of the Loan Documents, including this Agreement.
Borrower and Guarantors at their sole expense will promptly execute and
deliver to Bank upon its reasonable request all such other and further
documents, agreements and instruments in compliance with or accomplishment
of the covenants and agreements in this Agreement, or to correct any
omissions in the Notes or more fully to state the obligations set out
herein.
(g) Performance of Obligations. Borrower will pay the Notes and other
--------------------------
obligations incurred by it hereunder according to the reading, tenor and
effect thereof and hereof; and Borrower and Guarantors will do and perform
every act and discharge all of the obligations provided to be performed and
discharged by Borrower and Guarantors
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 26
<PAGE>
under the Loan Documents, including this Agreement, at the time or times
and in the manner specified.
(h) Insurance. Borrower will maintain, and will cause each of its
---------
Subsidiaries to maintain, insurance (including, without limitation,
property and casualty insurance in amounts reasonably acceptable to Bank)
with financially sound and reputable insurance companies in such amounts
and covering such risks as are usually carried by business entities engaged
in similar businesses and owning similar properties in the same general
areas in which Borrower and its Subsidiaries operate, provided that in any
event Borrower and its Subsidiaries will maintain medical professional
liability insurance coverage for each Subsidiary of at least $1,000,000 per
incident and $3,000,000 maximum coverage. Each insurance policy covering
Collateral or general liability shall name Bank as loss payee or as an
additional insured and shall provide that such policy shall not be canceled
or reduced without thirty (30) days prior written notice to Bank.
(i) Accounts and Records. Borrower and Guarantors will keep books,
--------------------
records and accounts in which full, true and correct entries will be made
of all dealings or transactions in relation to its business and activities,
prepared in a manner consistent with prior years, subject to changes
required by GAAP or suggested by Borrower's auditors.
(j) Right of Inspection. Borrower and Guarantors will permit any
-------------------
officer, employee or agent of Bank to examine Borrower's and Guarantors'
books, records and accounts, and make and retain copies and extracts
therefrom, all at such reasonable times and as often as Bank may reasonably
request.
(k) Notice of Certain Events. Borrower and Guarantors shall promptly
------------------------
notify Bank if Borrower or any such Guarantor learns of the occurrence of
(i) any event which constitutes, or which with the giving of notice or the
passage of time would constitute, an Event of Default (including, but not
limited to, a Change of Control or a Change of Management) together with a
detailed statement by Borrower or such Guarantor of the steps being taken
to cure the Event of Default or prospective Event of Default; or (ii) any
legal, judicial or regulatory proceedings affecting Borrower or any such
Guarantor, or any of the assets or properties of Borrower or any such
Guarantor, which, if adversely determined, could have a Material Adverse
Effect (determined for purposes of this Section 11(k) with respect to
Borrower or any Guarantor individually and not taken as a whole); or (iii)
any dispute between Borrower or any such Guarantor and any governmental or
regulatory body or any other Person which, if adversely determined, could
cause a Material Adverse Effect; or (iv) any other matter that is
reasonably likely to have a Material Adverse Effect.
(l) ERISA Information and Compliance. Borrower and Guarantors will
--------------------------------
promptly furnish to Bank, immediately upon becoming aware of the occurrence
of any "reportable event," as such term is defined in Section 4043 of
ERISA, or of any "prohibited transaction," as such term is defined in
Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986,
as amended, in connection with any Plan or any trust created thereunder, a
written notice signed by the President, Chief Executive
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 27
<PAGE>
Officer or the Chief Financial Officer of Borrower or such Guarantor, on
behalf of Borrower or such Guarantor, as applicable, specifying the nature
thereof, what action Borrower or such Guarantor is taking or proposes to
take with respect thereto, and, when known, any action taken by the
Internal Revenue Service with respect thereto.
(m) Environmental Reports and Notices. Borrower and Guarantors will
---------------------------------
deliver to Bank (i) promptly upon its becoming available, one copy of each
report sent by Borrower or any Guarantor to any court, governmental agency
or instrumentality pursuant to any Environmental Law, (ii) notice, in
writing, promptly upon Borrower's or any Guarantor's learning that it has
received notice or otherwise learned of any claim, demand, action, event,
condition, report or investigation indicating any potential or actual
liability arising in connection with (x) the non-compliance with or
violation of the requirements of any Environmental Law which could have a
Material Adverse Effect (determined for purposes of this Section 11(m) with
respect to Borrower or any Guarantor individually and not taken as a
whole); (y) the release or threatened release of any toxic or hazardous
waste into the environment which could have a Material Adverse Effect or
which release Borrower or any such Guarantor would have a duty to report to
any court or government agency or instrumentality, or (iii) the existence
of any Environmental Lien on any properties or assets of Borrower or any
such Guarantor, and Borrower or any such Guarantor shall immediately
deliver a copy of any such notice to Bank.
(n) Sale of Certain Assets/Prepayment of Proceeds. Without limiting
---------------------------------------------
Section 12(o), except for Inventory sold in the ordinary course of
business, Borrower will immediately pay Bank an amount equal to one hundred
percent (100%) of the proceeds (net of federal income taxes and direct
costs of sale) in excess of $25,000 in any fiscal year of Borrower,
received by Borrower and/or Guarantors from the sale of any of the
Collateral, to be applied against the Advance Term Loan. In addition,
Borrower shall notify Bank in writing of each such sale as soon as
practical and in no event later than three (3) Business Days after the
earlier of (y) the execution and delivery by Borrower or a Guarantor, as
applicable, of a letter of intent or similar instrument or document
relating to such sale, (z) the execution and delivery by Borrower or a
Guarantor, as applicable, of definitive agreements relating to such sale.
Borrower shall also, contemporaneously with such notice, provide Bank with
copies of such letter of intent, similar document or definitive agreements,
as applicable.
(o) "Key Man" Policies. Borrower will pay all premiums due on, and in
------------------
all other respects maintain in full force and effect and assigned to Bank
as collateral, the "Key Man" Policies. Provided, however, that Borrower may
cancel or allow to lapse the "Key Man" Policy on the life of Max W. Batzer,
without being in violation of this Section 11 and without causing an Event
of Default; provided, further, however, that unless such "Key Man" Policy
on the life of Max W. Batzer is so cancelled or allowed to lapse, the same
shall be assigned to Bank as collateral.
(p) Vehicles Subject to Certificates. To the extent Borrower has not
--------------------------------
previously done so, Borrower will, within thirty (30) days of the date of
this Agreement,
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 28
<PAGE>
deliver to Bank or to Automotive Rentals, Inc. pursuant to that certain
Custody and Agency Agreement dated as of January 8, 1998, a certificate of
title, or similar document, covering any vehicle owned by Borrower or any
Guarantor that is subject to any certificate of title or similar statute by
the jurisdiction in which any such vehicle is registered or located, which
certificate of title, or similar document, shall name Bank as secured party
or lienholder.
(q) Additional Subsidiary Guarantors. Borrower will take such action,
--------------------------------
and will cause each of its Subsidiaries to take such action, from time to
time as shall be necessary to ensure that all Subsidiaries of Borrower are
"Guarantors" hereunder. Without limiting the generality of the foregoing,
if Borrower or any of its Subsidiaries shall form or acquire any new
Subsidiary that shall constitute a Subsidiary hereunder (including, without
limitation, any Subsidiary of Borrower that shall become a Subsidiary of
Borrower in connection with any acquisition not prohibited by this
Agreement or with respect to which Bank has consented in writing), then
Borrower and its Subsidiaries will cause such new Subsidiary to
(i) become a "Guarantor" hereunder, and execute and deliver to
Bank a Guaranty in form and substance equivalent to the Guaranty
executed and delivered by each Guarantor on or prior to the date of
this Agreement;
(ii) execute and deliver to Bank a Security Agreement in form
and substance equivalent to the Security Agreement executed and
delivered by each Guarantor on or prior to the date of this Agreement;
(iii) cause such Subsidiary to take such action (including,
without limitation, delivering such shares of stock, executing and
delivering such Uniform Commercial Code financing statements and
executing and delivering mortgages covering any real property and
fixtures owned or leased by such Subsidiary) as shall be necessary to
create and perfect valid and enforceable first priority Liens (subject
only to Permitted Liens) on substantially all of the property of such
new Subsidiary as collateral security for the obligations of such new
Subsidiary hereunder and under its Guaranty; and
(iv) deliver such proof of corporate action, incumbency of
officers, opinions of counsel and other documents as are consistent
with those delivered by each of Borrower and Guarantors pursuant to
Section 10 upon the date of this Agreement or the date of the Prior
Agreement, as applicable, or as Bank shall have reasonably requested.
(r) Additional Collateral. With respect to any personal property
---------------------
assets of Borrower or any Guarantor currently subject to a Permitted Lien
or capital lease obligation, including vehicles, upon satisfaction of such
Permitted Lien or capital lease obligation, Borrower or any such Guarantor
shall execute and deliver such documents or instruments as may be necessary
to create and perfect in favor of Bank a first priority lien thereon
(subject to any other Permitted Lien).
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 29
<PAGE>
(s) Maintenance of Existence; Conduct of Business. Borrower will
---------------------------------------------
preserve and maintain, and will cause each Subsidiary to preserve and
maintain, its corporate existence and all of its leases, privileges,
licenses, permits, franchises, qualifications, and rights that are
necessary or desirable in the ordinary conduct of its business, except
where the failure to do so does not and will not have a Material Adverse
Effect. Without limiting the foregoing, Borrower will preserve and
maintain, and will cause each Subsidiary to preserve and maintain, to the
extent necessary or desirable in the ordinary conduct of its business, its
status as an approved provider with all governmental authorities
(including, without limitation, all agencies administering or enforcing
health care laws and regulations). Borrower will conduct, and will cause
each Subsidiary to conduct, its business in an orderly and efficient manner
in accordance with good business practices.
(t) Assignment of Tax Refund. As allowable by law, including
------------------------
applicable regulations under the Internal Revenue Code of 1986, as amended,
Borrower shall use its commercially reasonable best efforts to promptly
file and thereafter assign to Bank Borrower's 1998 federal income tax
refund ("Tax Refund"). Borrower agrees to cooperate with Bank and take all
steps required to assign and transfer to Bank its right, title and interest
in any and all monies due or payable to Borrower in connection with its
1998 federal income taxes, including, without limitation, execution of any
Lien instrument reasonably requested by Bank. Nothing in this Subsection
11(t) shall require or allow Borrower to disregard or violate any law,
statute, code, act, ordinance, order, judgment, decree, injunction, rule,
regulation, order promulgated by any federal, state, county, municipal or
other domestic government, department, commission, board, agency, court,
authority, official or officer.
(u) Borrower shall at all times maintain Eligible Accounts of
$6,500,000 or more.
12. NEGATIVE COVENANTS. A deviation from the provisions of this Section 12
shall not constitute an Event of Default under this Agreement if such deviation
is consented to in writing by Bank. Without the prior written consent of Bank,
Borrower, and to the extent applicable, each Guarantor, will at all times comply
with the covenants contained in this Section 12 from the date of this Agreement
and for so long as any part of the Loans are in existence.
(a) Liens. Neither Borrower nor any Guarantor will create, incur,
-----
assume or permit to exist any Lien on any of its assets or properties
except Permitted Liens.
(b) Consolidations, Mergers. Neither Borrower nor any Guarantor will
-----------------------
consolidate or merge with or into any other Person, except that (i) any
Guarantor or Guarantors may merge with any other Guarantor or Guarantors at
any time and from time to time, and (ii) Borrower or any such Guarantor may
at any time and from time to time merge with another Person if Borrower or
such Guarantor is the corporation surviving such merger and if, after
giving effect thereto, no Event of Default (or event that, with the
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 30
<PAGE>
passage of time or the giving of notice, or both, would constitute an Event
of Default) shall result or have occurred and be continuing.
(c) Minimum Quarterly EBITDA. Borrower shall cause EBITDA to be at
------------------------
least the following minimum amounts during the fiscal quarters indicated:
(i) for the quarter ending December 31, 1998, EBITDA shall be
at least $1,400,000;
(ii) for the quarter ending March 31, 1999, EBITDA shall be at
least $2,100,000; and
(iii) for the quarter ending June 30, 1999, EBITDA shall be at
least $2,850,000.
(d) Fixed Charge Coverage Ratio. Borrower will not permit the Fixed
---------------------------
Charge Coverage Ratio to ever be less than or equal to 1.0:1.0 at any time
during the period commencing on and including June 30, 1999 and ending on
and including December 31, 1999. Thereafter, Borrower will not permit the
Fixed Charge Coverage Ratio to ever be less than or equal to 1.2:1.0.
(e) Debt Ratios. Commencing on and including September 30, 1999,
-----------
Borrower will not permit the Funded Debt Ratio to ever be greater than
4.0:1.0, and will not permit the Senior Debt Ratio to ever be greater than
2.0:1.0.
(f) Current Ratio. Borrower will not permit the Current Ratio to ever
-------------
be less than 1.2:1.0.
(g) Debts, Guaranties and Other Obligations. Neither Borrower nor any
---------------------------------------
Guarantor will incur, create, assume or in any manner become or be liable
in respect of any indebtedness, nor will Borrower or any Guarantor
guarantee or otherwise in any manner become or be liable in respect of any
indebtedness, liabilities or other obligations of any other Person, whether
by agreement to purchase the indebtedness of any other Person or agreement
for the furnishing of funds to any other Person through the purchase or
lease of goods, supplies or services (or by way of stock purchase, capital
contribution, advance or loan) for the purpose of paying or discharging the
indebtedness of any other Person, or otherwise, except that the foregoing
restrictions shall not apply to:
(i) the Notes, and other indebtedness of Borrower or Guarantors
disclosed in Borrower's financial statements as set forth in its Form
10-Q for the fiscal quarter ended September 30, 1998 and also
disclosed (and specifically itemized) on Schedule 12(g) hereto;
(ii) taxes, assessments or other government charges that are not
yet due or are being contested in good faith by appropriate action
promptly initiated and diligently conducted, if such reserves as shall
be required by GAAP shall
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 31
<PAGE>
have been made therefor and levy and execution thereon have been
stayed and continue to be stayed;
(iii) any renewals, extensions, substitutions, refundings,
refinancings or replacements (collectively, a "refinancing") of any
indebtedness described in clause (i) above, including any successive
refinancings, so long as the aggregate principal amount of
indebtedness represented thereby is not increased by such refinancing
plus the amount of direct expenses of Borrower or a Guarantor, as
applicable, incurred in connection with such refinancing;
(iv) (A) the Subordinated Notes and (B) the guaranty thereof
contemplated by the Subordinated Note Agreement; and
(v) Accounts payable incurred in the ordinary course of
business consistent with past practice.
(h) Dividends. Neither Borrower nor any Guarantor will declare or pay
---------
any cash dividend, purchase, redeem or otherwise acquire for value any of
its stock now or hereafter outstanding, return any capital to stockholders,
or make any distribution of its assets to its stockholders as such;
provided, however, that the foregoing shall not prohibit any direct or
-------- -------
indirect wholly-owned Subsidiary of Borrower from paying dividends to, or
making distributions or paying management fees to, at any time and from
time to time, Borrower or any wholly-owned Subsidiary of Borrower.
(i) Loans and Advances. Neither Borrower nor any Guarantor shall make
------------------
or permit to remain outstanding any loans or advances to any Person, except
that the foregoing restriction shall not apply to (i) loans or advances
(and renewals and extensions thereof that do not increase the amount
thereof) the material details of which have been set forth in the financial
statements of Borrower as of and for the fiscal quarter ended September 30,
1998 and also disclosed (and specifically itemized) on Schedule 12(i); (ii)
loans or advances to Guarantors; and (iii) temporary advances to employees
of Borrower and its Subsidiaries for business or personal needs, not to
exceed $100,000 until March 31, 1999, $75,000 until June 30, 1999 and
$50,000 thereafter, in the aggregate at any time outstanding.
(j) Investments. Neither Borrower nor any Guarantor shall make
-----------
investments in (including for purposes of this clause (j), without
limitation, loan and advances to) any Person, except the foregoing
restriction shall not apply to:
(i) investments in direct or guaranteed obligations of the
United States of America or any agency thereof maturing within one
year from the date of acquisition;
(ii) expense accounts for directors, officers, and employees of
Borrower and Guarantors in the ordinary course of business and not to
exceed
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 32
<PAGE>
$10,000 in the aggregate outstanding at any time for any one director,
officer, or employee;
(iii) certificates of deposit issued by commercial banks
organized under the laws of the United States of America or any state
thereof and having (A) combined capital, surplus, and undivided
profits of not less than $100,000,000 and (B) a commercial paper
rating from Moody's Investors Service, Inc. or Standard & Poor's
Corporation of at least P-1 and A-1, respectively;
(iv) Eurodollar investments with financial institutions having
(A) combined capital, surplus, and undivided profits of not less than
U.S. $100,000,000, and (B) a commercial paper rated at least P-1 or A-
1 by Moody's Investors Service, Inc., or Standard & Poor's
Corporation, respectively, or, if any institution does not have a
commercial paper rating, a comparable bond rating of a least A or BAA-
1 by Standard & Poor's Corporation or Moody's Investors Service, Inc.,
respectively;
(v) extensions of credit in connection with trade receivables
and overpayments of trade payables, in each case resulting from
transactions in the ordinary course of business; and
(vi) loans or advances permitted by Section 12(i) and
investments disclosed on Schedule 12(j).
(k) Sale or Discount of Receivables. Neither Borrower nor any
-------------------------------
Guarantor will discount, sell or otherwise transfer, directly or
indirectly, any of their notes receivable or Accounts.
(l) Maximum Unleveraged Capital Expenditures. Neither Borrower nor
----------------------------------------
any Guarantor will make any Unleveraged Capital Expenditures in excess of
$500,000 in the aggregate during any fiscal year.
(m) Nature of Business. Neither Borrower nor any Guarantor will
------------------
permit any material change to be made in the character of their businesses
as carried on at the date of this Agreement.
(n) Amendment of Articles or Bylaws. Except for a change of name upon
-------------------------------
not less than thirty (30) days' prior written notice to Bank, neither
Borrower nor any Guarantor will permit any amendment to, or alteration of,
its Articles or Certificate of Incorporation (or equivalent charter
document) or bylaws, other than amendments to Borrower's Certificate of
Incorporation (i) to increase its authorized capital stock or (ii) to
create one or more series of preferred stock..
(o) Sale of Assets. Neither Borrower nor any Guarantor shall sell,
--------------
transfer or otherwise dispose of any of its assets except for Inventory and
obsolete Equipment in both cases sold in the ordinary course of business.
SECOND AMENDED AND
RESTATED LOAN AGREEMENT _ Page 33
<PAGE>
(p) Transactions with Affiliates. Neither Borrower nor any Guarantor
----------------------------
will enter into any transaction with any affiliate, except transactions
previously disclosed in Borrower's most recent reports on Form 10-KSB and
Form 10-Q and otherwise upon terms no less favorable to it than would be
obtained in a transaction negotiated at arm's length with an unrelated
third party.
(q) Acquisitions. Borrower shall not, and shall cause each of its
------------
Subsidiaries not to, consummate any Acquisition without Bank's prior
written consent (which may be given or withheld for any reason or no
reason, in either case in Bank's sole discretion). However, nothing in this
-------
Section 12(q) shall be construed to limit the prohibitions of Section
12(g).
(r) Regulation U. Neither Borrower, any Guarantor, nor any Person
------------
acting on behalf of Borrower or any of Guarantors has taken or will take
any action which might cause the loans hereunder or any of the Loan
Documents, including this Agreement, to violate Regulation U or any other
regulation of the Board of Governors of the Federal Reserve System or to
violate the Securities Exchange Act of 1934, as amended, or any rule or
regulation thereunder, in each case as now in effect or as the same may
hereafter be in effect.
(s) Subsidiary Stock. Borrower shall not permit any of its
----------------
Subsidiaries to, at any time, issue, sell, assign or otherwise dispose of
(a) any of its capital stock, (b) any securities exchangeable for or
convertible into or carrying any rights to acquire any of its capital
stock, or (c) any option, warrant, or other right to acquire any of its
capital stock, except, in each case, to Borrower or a wholly-owned
Subsidiary of Borrower.
(t) Fiscal Year. Neither Borrower nor any Guarantor shall change its
-----------
fiscal year.
(u) Modification of Subordinated Notes or Subordinated Note
-------------------------------------------------------
Agreement. Neither Borrower nor any Guarantor shall amend or otherwise
---------
modify any one or more of the Subordinated Notes, the Subordinated Note
Agreement or the guaranty thereof contemplated by the Subordinated Note
Agreement.
(v) Payment, Redemption or Purchase of Subordinated Notes. Except for
-----------------------------------------------------
regular, scheduled quarterly interest payments, required principal payments
of $6,666,667 on April 17 in each of the years 2003, 2004 and 2005, and the
repurchase of the Subordinated Notes by Borrower as a result of, and not
earlier than sixty (60) days after the occurrence of, a Change in Control
(as defined in the Subordinated Note Agreement) that is not at the time of
repurchase an Event of Default hereunder, neither Borrower nor any
Guarantor shall pay, redeem, purchase, repurchase, prepay or otherwise
acquire for value any of the Subordinated Notes.
13. EVENTS OF DEFAULT. Any one or more of the following events shall be
considered an "Event of Default" as that term is used herein:
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 34
<PAGE>
(a) Borrower or, to the extent applicable, any Guarantor shall fail
to pay when due or declared due the principal of, and the interest on any
of, the Obligations, including the Notes or any fee or any other
indebtedness of Borrower or any Guarantor incurred pursuant to this
Agreement, any of the other Security Instruments or any of the other Loan
Documents; or
(b) Any representation or warranty made under this Agreement, or in
any certificate or statement furnished or made to Bank pursuant hereto, or
in connection herewith, or in connection with any document furnished
hereunder, shall prove to be untrue in any material respect as of the date
on which such representation or warranty is made (or deemed made), or any
representation, statement (including financial statements), certificate,
report or other data furnished or to be furnished or made by Borrower or
any Guarantor under any of the Loan Documents, including this Agreement,
proves to have been untrue in any material respect, as of the date as of
which the facts therein set forth were stated or certified; or
(c) Borrower or a Guarantor (i) shall fail to perform or to observe
any covenant contained in Sections 11(a), (b), (c), (h), (n), (o), (p),
(q), or (s) or any provision of Section 12; or (ii) shall fail to perform
or to observe any covenant or agreement contained herein or in any of the
other Loan Documents, other than covenants referred to in Sections 13(a),
(b) and (c) (i) above, and, if such failure is subject to being remedied,
such failure shall remain unremedied for twenty (20) days after the earlier
of an officer of such corporation becoming aware thereof or notice thereof
being given by Bank to Borrower; or
(d) Default shall be made in respect of (i)(A) any payment obligation
(regardless of amount) for borrowed money, other than the Notes, for which
Borrower or any Guarantor is liable (directly, by assumption, as guarantor
or otherwise) in an aggregate principal amount in excess of $50,000, (B)
any payment obligation (regardless of amount) secured by any Lien on any
asset or property of Borrower or any Guarantor having an aggregate book
value or fair market value, whichever is greater, in excess of $50,000, or
(C) any lease payment (regardless of amount) relating to a capital lease
obligation of Borrower or a Guarantor in an aggregate principal amount in
excess of $50,000, or (ii) any performance obligation (other than a payment
obligation) with respect to an agreement involving $50,000 or more;
provided, however, that such default, (i) if a payment default, shall
-------- -------
continue beyond the greater of (A) ten days and (B) the lesser of (x)
twenty days and (y) the applicable grace period, if any, and (ii) if a non-
payment default, shall continue beyond the greater of (C) ten days and (D)
the applicable grace period, if any; provided, further, however, that the
-------- ------- -------
foregoing proviso shall apply only if Borrower promptly gives Bank notice
of such default; and further provided, that this Section 13(d)(i)(C) shall
not be applicable with respect to those capitalized leases referenced in
Section 6 as being in default on the date of this Agreement, but only for
so long as (and in any event not beyond January 15, 1999) and only to the
extent that Borrower continues to negotiate in good faith with the subject
lessors with respect to the refinancing of the obligations under such
leases; or
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 35
<PAGE>
(e) Borrower or any Guarantor shall commence a voluntary case or
other proceedings seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking an appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its property, or shall consent to any such relief
or to the appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it, or shall make a
general assignment for the benefit of creditors, or shall fail generally to
pay its debts as they become due, or shall take any corporate action
authorizing the foregoing; or
(f) An involuntary case or other proceeding shall be commenced
against Borrower or any Guarantor seeking liquidation, reorganization or
other relief with respect to it or its debts under any bankruptcy,
insolvency or similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed
for a period of sixty (60) days; or an order for relief shall be entered
against Borrower or any Guarantor under the federal bankruptcy laws as now
or hereinafter in effect; or
(g) A final judgment or order for the payment of money in excess of
$50,000 (or judgments or orders for the payment of money aggregating in
excess of $50,000), exclusive of amounts covered by insurance (as the
applicability of insurance coverage is determined by Borrower in good
faith, but in any event excluding from coverage matters as to which the
applicable insurance company has stated specific grounds for denying, or
for reserving its right to deny, coverage (excluding any such reservation
of rights that is customary for such insurance company)) shall be rendered
against Borrower or any Guarantor and such judgments or orders shall
continue unsatisfied or unstayed for a period of thirty (30) days; or
(h) Borrower shall fail to comply in any respect with the mandatory
prepayment provisions set forth in Section 8; or
(i) A Change of Control shall occur; provided, however, that a
-------- -------
Change of Control shall not be an Event of Default hereunder after the
sixtieth (60th) day after the date the same occurs if the same occurs
pursuant to clause (ii) of the definition thereof, if Bank receives written
notice thereof not later than the day after the same occurs and if, on such
sixtieth (60th) day (A) Borrower remains under a contractual obligation as
provided in the Subordinated Note Agreement to repurchase the Subordinated
Notes and (B) Bank has not done any of the following in connection with
such Change of Control: (1) declared an Obligation to be forthwith due and
payable, (2) otherwise exercised rights under the Loan Documents to collect
an Obligation, or (3) availed itself of the benefit of the subordination
provisions set forth in the Subordinated Note Agreement; or
(j) A Change of Management shall occur; or
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 36
<PAGE>
(k) Any Loan Document or any provision thereof shall be alleged by
Borrower or confirmed by any court of competent jurisdiction to be
unenforceable in any respect; or
(l) An "Event of Default" (as defined in the Subordinated Note
Agreement) occurs and is continuing under the Subordinated Note Agreement.
Upon occurrence of any Event of Default specified in Subsections 13(e) and
(f), the Revolving Loan Commitment shall terminate and the entire principal
amount due under the Notes and all interest then accrued thereon, and any other
liabilities of Borrower and any Guarantor hereunder and under the other Loan
Documents, shall become immediately due and payable, all without notice and
without presentment, demand, protest, notice of protest or dishonor, notice of
intent to accelerate, notice of acceleration, or any other notice of any kind,
all of which are hereby expressly waived by Borrower and each Guarantor. Upon
any other Event of Default that has occurred and is continuing, Bank may by
notice to Borrower terminate the Revolving Loan Commitment and declare the
principal of, and all interest then accrued on, the Notes and any other
liabilities of Borrower and any Guarantor and under the other Loan Documents
hereunder to be forthwith due and payable, whereupon the same shall forthwith
become due and payable without presentment, demand, protest, notice of protest
or dishonor, notice of intent to accelerate, notice of acceleration or any other
notice of any kind, all of which Borrower and each Guarantor hereby expressly
waive, anything contained herein or in the Notes to the contrary
notwithstanding. Nothing contained in this Section 13 shall be construed to
limit or amend in any way events of default enumerated in any other Loan
Documents.
Upon the occurrence and during the continuance of any Event of Default,
Bank is hereby authorized at any time and from time to time, without notice to
Borrower and Guarantors (any such notice being expressly waived by Borrower and
each Guarantor), to set-off and apply any and all deposits (general or special,
time or demand, provisional or final, or otherwise) at any time held and other
indebtedness at any time owing by Bank to or for the credit or the account of
Borrower and Guarantors (other than amounts specifically held in trust for
others) against any and all of the indebtedness of Borrower and Guarantors under
the Notes and the other Loan Documents, including this Agreement, irrespective
of whether or not Bank shall have made any demand under the Loan Documents,
including this Agreement or the Notes and although such indebtedness may be
unmatured. Any amount set-off by Bank shall be applied against the indebtedness
owed Bank by Borrower or Guarantors pursuant to this Agreement and the Notes.
Bank agrees promptly to notify Borrower and Guarantors after any such set-off
and application, provided that the failure to give such notice shall not affect
the validity of such set-off and application. The rights of Bank under this
Section 13 are in addition to other rights and remedies (including, without
limitation, other rights of set-off) that Bank may have, including at common
law.
14. EXERCISE OF RIGHTS. No failure to exercise, and no delay in
exercising, on the part of Bank, any right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right. The rights of Bank
hereunder shall be in addition to all other rights provided by law. No
modification or waiver of any provision of the Loan Documents, including this
Agreement, or
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 37
<PAGE>
the Notes, nor consent to departure therefrom, shall be effective unless in
writing, and no such consent or waiver shall extend beyond the particular case
and purpose involved. No notice or demand given in any case shall constitute a
waiver of the right to take other action in the same, similar or other
circumstances without such notice or demand.
15. NOTICES. Any notices or other communications required or permitted to
be given by this Agreement or any other Loan Documents must be given in writing
(which may be by facsimile transmission) and must be personally delivered,
telecopied or mailed by prepaid certified or registered mail to the party to
whom such notice or communication is directed at the address of such party as
follows: (a) BORROWER and GUARANTORS: DIAGNOSTIC HEALTH SERVICES, INC., 2777
Stemmons Freeway, Suite 1525, Dallas, Texas 75207, Facsimile No. 214-689-6459,
Attention: Mr. Brad A. Hummel, President; (b) BANK: CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION, 2200 Ross Avenue, Dallas, Texas 75201 Facsimile No. 214-
965-2384, Attention: Steven T. Prichett, Vice President. Any such notice or
other communication shall be deemed to have been given (whether actually
received or not) on the day it is personally delivered or telecopied as
aforesaid or, if mailed as aforesaid, on the fifth day after it is mailed. Any
party may change its address for purposes of this Agreement by giving notice of
such change to the other party pursuant to this Section 15.
16. EXPENSES. Borrower and Guarantors, jointly and severally, shall pay
(i) all reasonable and necessary out-of-pocket expenses of Bank, including
reasonable fees and disbursements of special counsel for Bank, in connection
with (A) the negotiation, preparation, execution, filing, recording, re-filing,
recording, re-filing, re-recording, modification, amendment, supplementation and
waiver of any one or more of the Loan Documents, and (B) any default or Event of
Default hereunder, (ii) all reasonable and necessary out-of-pocket expenses of
Bank, including reasonable fees and disbursements of Locke, Purnell, Rain,
Harrell (a Professional Corporation) or Locke, Liddell & Sapp, L.L.P., its
contemplated successor, or other special counsel for Bank, in connection with
the preparation of any participation agreement for a participant or participants
requested by Borrower or any amendment thereof and (iii) if a default or an
Event of Default occurs, all reasonable and necessary out-of-pocket expenses
incurred by Bank, including fees and disbursements of counsel, in connection
with such default or Event of Default, as applicable, and collection and other
enforcement proceedings resulting therefrom. Borrower shall indemnify Bank
against any transfer taxes, document taxes, and other like assessments and
charges, made by any governmental authority by reason of the execution and
delivery of this Agreement or the Notes. The obligation of Borrower and
Guarantors set forth in this Section 16 shall survive any termination of this
Agreement, the expiration of the Loans and the payment of all indebtedness of
Borrower to Bank hereunder and under the Notes and the other Loan Documents.
17. INDEMNITY; CAPITAL ADEQUACY.
(a) Borrower and each Guarantor agree to indemnify and hold harmless
Bank and its officers, employees, agents, attorneys and representatives
(singularly, an "Indemnified Party", and collectively, the "Indemnified
Parties") from and against any loss, cost, liability, damage or expense
(including the reasonable fees and out-of-pocket expenses of counsel to
Bank, including all local counsel hired by such counsel) ("Claim")
SECOND AMENDED AND
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<PAGE>
incurred by Bank in investigating or preparing for, defending against, or
providing evidence, producing documents or taking any other action in
respect of any commenced or threatened litigation, administrative
proceeding or investigation under any federal securities law, federal or
state environmental law, or any other statute of any jurisdiction, or any
regulation, or at common law or otherwise, which is alleged to arise out of
or is based upon any acts, practices or omissions or alleged acts,
practices or omissions of Borrower, any of Guarantors or their agents or
arises in connection with the duties, obligations or performance of the
Indemnified Parties in negotiating, preparing, executing, accepting,
keeping, completing, countersigning, issuing, selling, delivering,
releasing, assigning, handling, certifying, processing or receiving or
taking any other action with respect to the Loan Documents and all
documents, items and materials contemplated thereby, even if any of the
foregoing arises out of an Indemnified Party's ordinary negligence. The
indemnity set forth herein shall be in addition to any other obligations or
liabilities of Borrower and Guarantors to Bank hereunder or at common law
or otherwise, and shall survive any termination of this Agreement, the
expiration of the Loans and the payment of all indebtedness of Borrower to
Bank hereunder and under the Notes, provided that neither Borrower nor any
Guarantor shall have any obligation under this Section 17 to Bank with
respect to any of the foregoing arising out of the gross negligence or
willful misconduct of Bank or any other Indemnified Party. If any Claim is
asserted against any Indemnified Party, the Indemnified Party shall
endeavor to notify Borrower of such Claim (but failure to do so shall not
affect the indemnification herein made except to the extent of the actual
harm caused by such failure). The Indemnified Party shall have the right to
employ, at Borrower's expense, counsel of the Indemnified Parties' choosing
and to control the defense of the Claim. Borrower may at its own expense
also participate in the defense of any Claim. Each Indemnified Party may at
Borrower's expense employ separate counsel in connection with any Claim to
the extent such Indemnified Party believes it reasonably prudent to protect
such Indemnified Party.
THE PARTIES INTEND FOR THE PROVISIONS OF THIS SUBSECTION 17(A) TO
APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM THE CONSEQUENCES OF ITS
OWN NEGLIGENCE, WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE, CONTRIBUTING,
OR CONCURRING CAUSE OF ANY CLAIM.
(b) (i) If after the date of this Agreement, Bank shall have
determined that the adoption of any applicable law, rule or regulation
regarding capital adequacy, or any change therein, or any change in
the interpretation or administration thereof, or compliance by Bank
with any request or directive regarding capital adequacy (whether or
not having the force of law) of any such authority, central bank or
comparable agency, has or would have the effect of reducing the rate
of return on Bank's capital as a consequence of its obligations
hereunder to a level below that which Bank could have achieved but for
such adoption, change or compliance (taking into consideration Bank's
policies with respect to capital adequacy) by an amount deemed by Bank
to be material, then from time to time, Borrower shall pay to Bank
such additional amount or amounts as will compensate Bank for such
reduction.
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 39
<PAGE>
(ii) A certificate of Bank setting forth such amount or amounts
as shall be necessary to compensate Bank as specified in paragraph (i)
above shall be delivered as soon as practicable to Borrower and shall
be conclusive and binding, absent manifest error. Borrower shall pay
Bank the amount shown as due on any such certificate within 15 days
after Bank delivers such certificate. In preparing such certificate,
Bank may employ such assumptions and allocations of costs and expenses
as it shall in good faith deem reasonable and may use any reasonable
averaging and attribution method.
18. GOVERNING LAW. THIS AGREEMENT IS BEING EXECUTED AND DELIVERED, AND IS
INTENDED TO BE PERFORMED, IN DALLAS, DALLAS COUNTY, TEXAS, AND THE APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA AND THE SUBSTANTIVE LAWS OF TEXAS SHALL
GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATION OF THIS
AGREEMENT AND ALL OTHER LOAN DOCUMENTS, UNLESS OTHERWISE SPECIFIED THEREIN.
19. INVALID PROVISIONS. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, then such provisions shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
20. MAXIMUM INTEREST RATE. Regardless of any provisions contained in this
Agreement or in any other Loan Documents, Bank shall never be deemed to have
contracted for or be entitled to receive, collect or apply as interest on the
Notes or otherwise any amount in excess of the maximum rate of interest
permitted to be charged by applicable law, and if Bank ever receives, collects
or applies as interest any such excess, or if acceleration of the maturity of
the Notes or if any prepayment by Borrower results in Borrower having paid any
interest in excess of the maximum rate, such amount which would be excessive
interest shall be applied to the reduction of the unpaid principal balance of
the Notes for which such excess was received, collected or applied, and, if the
principal balances of Notes are paid in full, any remaining excess shall
forthwith be paid to Borrower. All sums paid or agreed to be paid to Bank for
the use, forbearance or detention of the indebtedness evidenced by the Notes
and/or this Agreement shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full term of such
indebtedness until payment in full so that the rate or amount of interest on
account of such indebtedness does not exceed the maximum lawful rate permitted
under applicable law. In determining whether or not the interest paid or payable
under any specific contingency exceeds the maximum rate of interest permitted by
law, Borrower and Bank shall, to the maximum extent permitted under applicable
law, (i) characterize any non-principal payment as an expense, fee or premium,
rather than as interest; and (ii) exclude voluntary prepayments and the effect
thereof; and (iii) compare the total amount of interest contracted for, charged
or received with the total amount of interest which could be contracted for,
charged or
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 40
<PAGE>
received throughout the entire contemplated term of the Notes at the maximum
lawful rate under applicable law.
21. AMENDMENTS. This Agreement may be amended only by an instrument in
writing executed by an authorized officer of the party against whom such
amendment is sought to be enforced.
22. MULTIPLE COUNTERPARTS, ETC. This Agreement may be executed in a number
of identical separate counterparts, each of which for all purposes is to be
deemed an original, but all of which shall constitute, collectively, one
agreement. No party to this Agreement shall be bound hereby until a counterpart
of this Agreement has been executed by all parties hereto. References herein to
Sections are references to Sections of this Agreement unless the context
indicates to the contrary.
23. CONFLICT. If any term or provision of this Agreement is inconsistent
with or conflicts with any provision of the other Loan Documents, then the terms
or provisions contained in this Agreement shall be controlling.
24. SURVIVAL. All covenants, agreements, undertakings, representations
and warranties made in the Loan Documents, including this Agreement and the
Notes, shall survive all closings hereunder and shall not be affected by any
investigation made by any party.
25. PARTIES BOUND. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns, heirs,
legal representatives and estates; provided, however, that neither Borrower nor
-------- -------
any Guarantor may, without the prior written consent of Bank, assign any rights,
powers, duties or obligations hereunder.
26. PARTICIPATIONS. Bank shall have the right at any time and from time
to time to sell one or more participations in the Notes or any Advance or other
portion thereof; provided, however, that Bank will not at any time retain less
-------- -------
than a fifty percent (50%) interest in the indebtedness represented by the
Notes. To the extent of any such participation the provisions of this Agreement
shall inure to the benefit of, and be binding on, each participant, including,
but not limited to, any indemnity from Borrower to Bank. Borrower shall have no
obligation or liability to and no obligation to negotiate or confer with, any
participant, and Borrower shall be entitled to treat Bank as the sole owner of
the Notes without regard to notice or actual knowledge of any such
participation. Upon the occurrence of a default or an Event of Default, each
participant will have and is hereby granted the right to setoff against and to
appropriate and apply from time to time, without prior notice to Borrower or any
other party, any such notice being hereby expressly waived, any and all deposits
(general or special or other indebtedness or claims, direct or indirect,
contingent or otherwise), at any time held or owing by the participant to or for
the credit or account of Borrower against the payment of the Notes and any other
obligations of Borrower hereunder or under the other Loan Documents; provided,
--------
however, that none of the rights granted in this Section 25 shall apply to any
- -------
deposits held by any participant constituting trust funds and so identified to
such participant at the time the applicable deposit account is created.
Immediately after such setoff or appropriation by a participant, that
participant shall
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 41
<PAGE>
give Borrower and Bank written notice thereof. However, a failure to give such
notice will not affect the validity of such setoff or appropriation.
27. WAIVER OF TRIAL BY JURY. EACH OF BORROWER AND GUARANTORS WAIVES ANY
AND ALL RIGHTS THAT IT MAY HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM OR
OTHER ACTION, OF ANY NATURE WHATSOEVER, RELATING TO OR ARISING OUT OF THIS
AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS OR THE OBLIGATIONS. EACH OF BORROWER
AND GUARANTORS ACKNOWLEDGES THAT THE FOREGOING JURY TRIAL WAIVER IS A MATERIAL
INDUCEMENT TO BANK'S ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
AND THAT BANK IS RELYING ON SUCH WAIVER IN ITS FUTURE DEALINGS WITH SUCH
CORPORATION. EACH SUCH CORPORATION WARRANTS AND REPRESENTS TO BANK THAT SUCH
CORPORATION HAS REVIEWED THE FOREGOING JURY TRIAL WAIVER WITH ITS LEGAL COUNSEL
AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH SUCH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THE FOREGOING
JURY TRIAL WAIVER MY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
28. WAIVER OF CONSUMER RIGHTS. EACH OF BORROWER AND GUARANTORS HEREBY
WAIVES ALL OF ITS RIGHTS UNDER THE TEXAS DECEPTIVE TRADE PRACTICES - CONSUMER
PROTECTION ACT (TEX. BUS. & COM. CODE (S) 17.41 ET SEQ.), A LAW THAT GIVES
CONSUMERS SPECIAL RIGHTS AND PROTECTIONS, AND REPRESENTS AND WARRANTS TO BANK
THAT SUCH CORPORATION (A) VOLUNTARILY CONSENTS TO THIS WAIVER, (B) HAS KNOWLEDGE
AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE SUCH CORPORATION TO
EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT, INCLUDING THIS WAIVER, (C) IS NOT IN A SIGNIFICANTLY DISPARATE
BARGAINING POSITION RELATIVE TO BANK, AND (D) HAS BEEN REPRESENTED BY, AND
CONSULTED WITH, LEGAL COUNSEL OF ITS OWN SELECTION IN CONNECTION WITH SUCH
TRANSACTIONS, INCLUDING THIS WAIVER.
29. OTHER AGREEMENTS. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 42
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
BORROWER:
DIAGNOSTIC HEALTH SERVICES, INC.
a Delaware corporation
By:_____________________________________
Name: Brad A. Hummel
Title: President
GUARANTORS:
DHS MANAGEMENT SERVICES, INC., MOBILE DIAGNOSTIC SYSTEMS, INC., a Texas
a Texas corporation corporation
By:______________________________ By:_____________________________________
Name: Brad A. Hummel Name: Brad A. Hummel
Title: President Title: President
ALPHA SCANNING SERVICE, INC., HEART INSTITUTE OF TULSA, INC.,
a Louisiana corporation an Oklahoma corporation
By:______________________________ By:_____________________________________
Name: Brad A. Hummel Name: Brad A. Hummel
Title: Chief Operating Officer Title: President
SPECIALIZED IMAGING SERVICES INC., MOBILE DIAGNOSTIC IMAGING, INC.,
an Illinois corporation a Delaware corporation
By:______________________________ By:_____________________________________
Name: Brad A. Hummel Name: Brad A. Hummel
Title: President Title: President
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 43
<PAGE>
ST. LOUIS MOBILE ULTRASOUND, INC., ULTRASOUND DIAGNOSTIC
a Delaware corporation SERVICES, LTD.,
an Arizona corporation
By:_______________________________ By:_____________________________________
Name: Brad A. Hummel Name: Brad A. Hummel
Title: President Title: President
SOCAL SUBSIDIARY I, INC., SOCAL SUBSIDIARY II, INC.,
a California corporation a California corporation
By:_______________________________ By:_____________________________________
Name: Brad A. Hummel Name: Brad A. Hummel
Title: President Title: President
HOMECARE INTERNATIONAL, INC., SANTA MONICA IMAGING CENTER
a Texas corporation LIMITED PARTNERSHIP,
a California limited partnership
By:_______________________________ By:_____________________________________
Name: Brad A. Hummel Name: Brad A. Hummel
Title: President Title: President
SONOMED, INC., DIAGNOSTIC HEALTH SERVICES DE
an Alabama corporation MEXICO, S.A. DE C.V. a corporation
incorporated under the laws of the
Republic of Mexico
By:_______________________________ By:_____________________________________
Name: Brad A. Hummel Name: Brad A. Hummel
Title: President Title: Director
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 44
<PAGE>
SOCAL DIAGNOSTIC SERVICES, INC. ADVANCED DIAGNOSTIC IMAGING,
a California corporation INC., a Texas corporation
By:__________________________________ By:_____________________________________
Name: Brad A. Hummel Name: Brad A. Hummel
Title: President Title: President
PEDIATRIC ECHOCARDIOGRAPHIC DIAGNOSTIC CARDIAC CONCEPTS, INC.,
IMAGING, INC., a Texas corporation
a Texas corporation
By:__________________________________ By:_____________________________________
Name: Brad A. Hummel Name: Brad A. Hummel
Title: President Title: President
BANK:
CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION,
a national banking association
By:__________________________________
Steven T. Prichett,
Vice President
SECOND AMENDED AND
RESTATED LOAN AGREEMENT - Page 45
<PAGE>
EXHIBIT 10.19
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIAGNOSTIC HEALTH SERVICES, INC.
___________________
FIRST AMENDMENT
dated as of December 31, 1998
to
Note Agreement dated as of April 16, 1997
___________________
Re: $20,000,000 10.50% Senior Subordinated Notes Due April 17, 2005
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.19
FIRST AMENDMENT TO NOTE AGREEMENT
THIS FIRST AMENDMENT TO NOTE AGREEMENT dated as of December 31, 1998
(this "FIRST AMENDMENT"), is entered into by and between DIAGNOSTIC HEALTH
SERVICES, INC., a Delaware corporation (the "COMPANY"), and THE PRUDENTIAL
INSURANCE COMPANY OF AMERICA ("PRUDENTIAL").
RECITALS
--------
A. The Company and Prudential entered into a Note Agreement dated as of
April 16, 1997 (as amended, supplemented or otherwise modified from time to
time, the "NOTE AGREEMENT"), pursuant to which the Company issued and sold to
Prudential and Prudential purchased, on the terms and conditions therein set
forth, the Company's Senior Subordinated Notes due April 17, 2005, in an
aggregate principal amount of $20,000,000 (the "NOTES"). Prudential remains the
holder of 100% of the outstanding principal amount of the Notes. Capitalized
terms used and not otherwise defined herein shall have the respective meanings
ascribed to them in the Note Agreement.
B. Payment of the Notes and performance and observance of all other
obligations of the Company arising under or in connection with the Note
Agreement have been guaranteed by the Subsidiaries of the Company (other than
Scripps Chula Vista Imaging Center, L.P.) and will also be guaranteed by all
subsequently organized or acquired Subsidiaries of the Company (as amended,
supplemented or otherwise modified and in effect from time to time, the
"SUBSIDIARY GUARANTY").
C. Effective as of December 31, 1998, the Company, the subsidiaries of
the Company specified on the signature pages thereto and Chase Bank of Texas,
National Association ("BANK") entered into a Second Amended and Restated Loan
Agreement (as amended, supplemented or otherwise modified from time to time, the
"BANK AGREEMENT"), which Bank Agreement amended and restated in its entirety the
Amended and Restated Loan Agreement, dated as of July 24, 1996, as amended, by
and among the Company, as Borrower, DHS Management Services, Inc., Mobile
Diagnostic Systems, Inc., Alpha Scanning Service, Inc., Heart Institute of
Tulsa, Inc., Specialized Imaging Services Inc., Mobile Diagnostic Imaging, Inc.,
St. Louis Mobile Ultrasound, Inc., HDI Acquisition Corp., Cardio Graphic
Consultants, Inc., Heart Diagnostic Institutes, Inc., Homecare International,
Inc., Diagnostic Health Services de Mexico, S.A. de C.V., Homecare International
de Mexico, S.A. de C.V., Neonatal Pediatric Echocardiography, Inc., Pediatric
Echocardiographic Diagnostic Imaging, Inc., as Guarantors, and Texas Commerce
Bank, National Association, as Bank.
D. The Company currently is in Default under the Note Agreement.
E. Prudential has agreed, on the terms and conditions set forth herein,
to waive the
<PAGE>
Reporting Defaults (as hereinafter defined) and the Financial Covenant Defaults
(as hereinafter defined) under the Note Agreement outstanding through and
including November 30, 1998 and all the Lease Defaults (as hereinafter defined)
under the Note Agreement as of the date hereof.
F. In furtherance of the foregoing, the Company and Prudential now desire
to amend the Note Agreement in the respects, but only in the respects,
hereinafter set forth.
NOW, THEREFORE, the Company and Prudential, in consideration of the
foregoing and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, do hereby agree as follows:
SECTION 1. WAIVER OF REPORTING, FINANCIAL COVENANT AND OTHER DEFAULTS.
The Company acknowledges that (a) as of October 31, 1998, the Company
did not comply with the reporting and financial covenants ("REPORTING DEFAULTS"
and "FINANCIAL COVENANT DEFAULTS," respectively) set forth in Paragraphs 5A,
6A(1) and 6A(2), respectively, of the Note Agreement and (b) as previously
disclosed to Prudential in writing, on the date hereof, the Company and certain
Guarantors are in default of payment in the approximate aggregate amount of
$1,223,294, under capitalized leases ("LEASE DEFAULTS"), which capital leases
are in the approximate aggregate principal amount of $14,582,251. As a result,
as of November 30, 1998 and the date hereof, Events of Default (as defined in
the Note Agreement) existed and continue to exist under the Note Agreement.
Pursuant to this Section 1, Prudential waives all Financial Covenant
Defaults, Reporting Defaults and Events of Default extant on November 30, 1998
and previously disclosed to Prudential in writing. In addition, Prudential
waives all Lease Defaults extant as of the date hereof and previously disclosed
to Prudential in writing. Prudential's waiver of Lease Defaults is subject to
the condition subsequent that all Lease Defaults are cured by 5:00 p.m. central
standard time on January 15, 1999. The Company must submit to Prudential by 5:00
p.m. central standard time on January 15, 1999 evidence of such cure, which
evidence must be acceptable to Prudential in its sole discretion ("CURE
EVIDENCE"). In the absence of Prudential's receipt of Cure Evidence, an Event of
Default will exist. This waiver is with respect to the foregoing defaults only,
and does not create any obligation on Prudential's part to grant any similar
waivers or extensions under similar or dissimilar circumstances. Without
limiting the foregoing, any Events of Default arising after November 30, 1998
(other than those described in the immediately preceding paragraph) are not
waived by this Section 1. This waiver shall become effective only upon the
Company's and Guarantors' execution of this Agreement. It is understood and
agreed that, except as set forth in this Section 1, Prudential waives no rights
---------
whatsoever with respect to remedies available to it with respect to the Note
- ----------
Agreement and the other Note Documents.
The Company (a) represents and warrants that no Event of Default as
defined in the Note Agreement (or any event that would, with the giving of
notice or passage of time, or both, constitute an Event of Default) has occurred
and is continuing under the Note Agreement or the other Note Documents, other
than those described in this Section 1; and (b) represents and agrees that it in
no way expects, has been led to expect, or will rely upon any other waiver,
extension,
-2-
<PAGE>
forbearance or consent not agreed to by Prudential in writing in this Section 1
or prior to the date of this First Amendment.
SECTION 2. AMENDMENTS TO NEGATIVE COVENANTS.
(a) Amendments to Paragraph 6A (Financial Covenants). Paragraph
------------------------------------------------
6A is amended as follows:
(i) Paragraph 6A(1) is amended by deleting it in its
entirety and replacing it with the following:
(1) FIXED CHARGES. The ratio of (a) the sum of
EBITDA plus Consolidated Lease/Rental Expenses to (b)
Consolidated Fixed Charges, for any period of four
consecutive fiscal quarters, (i) for the period
commencing on and including July 1, 1999 and ending on
and including December 31, 1999, to be less than or
equal to 1.0:1.0, and (ii) during the period commencing
on and including January 1, 2000 and ending on and
including June 30, 2001, to be less than or equal to
1.2:1.0, and (iii) thereafter, to be less than or equal
to 1.5:1.0.
(ii) Paragraph 6A(2) is amended by deleting it in its
entirety and replacing it with the following:
(2) CONSOLIDATED NET WORTH. Consolidated Net
Worth on the last day of any fiscal quarter, commencing
with the fiscal quarter ended September 30, 1998, to be
less than the sum of (i) $56,760,266 plus (ii) 70% of
----
any Equity Proceeds received after September 30, 1998
plus (iii) the cumulative total of 50% of Consolidated
----
Net Earnings of the Company and its Subsidiaries (but
not including the Consolidated Net Earnings of any
Acquired Company for any periods prior to such Acquired
Company becoming a Subsidiary) for each fiscal quarter
after September 30, 1998 in which such Consolidated Net
Earnings is greater than $0, to and including the
fiscal quarter ended on such measurement date;
provided, however, that there may be deducted from the
-------- -------
Consolidated Net Worth, calculated as aforesaid, the
following aggregate adjustments, charges and reserves
to the extent recorded subsequent to September 30, 1998
and to the extent in excess of the otherwise applicable
Consolidate Net Earnings in the fiscal quarter in which
same are recorded: (A) up to $10,029,000 for
adjustments to 1998 net income, and up to $11,883,000
for adjustments to pre-1998 net income, arising out of
the change in accounting principles disclosed in the
Company's quarterly report on Form 10-Q for the quarter
ended September 30, 1998, (B) up to $21,822,000 for
-3-
<PAGE>
impairment of goodwill and other assets, and (C) up to
$1,000,000 for additional bad debt reserves.
(iii) Paragraph 6A(4) is amended by deleting "3.5:1.0" and
replacing it with "2.0:1.0".
(iv) Paragraph 6A is amended by adding the following
Paragraph 6A(5):
(5) MINIMUM QUARTERLY EBITDA. The Company shall
cause EBITDA to be at least the following minimum amounts during the fiscal
quarters indicated:
(i) for the quarter ending December 31,
1998, EBITDA shall be at least $1,400,000;
(ii) for the quarter ending March 31, 1999,
EBITDA shall be at least $2,100, 000; and
(iii) for the quarter ending June 30, 1999,
EBITDA shall be at least $2,850,000.
(b) Amendment to Paragraph 6C (Limitation on Asset Dispositions).
------------------------------------------------------------
Paragraph 6C of the Note Agreement is amended by deleting it in its entirety and
replacing it with the following:
6C. SALE OF ASSETS. Except for asset transfers by Wholly Owned
Subsidiaries to the Company or other Wholly Owned Subsidiaries, neither the
Company nor any of the Subsidiaries of the Company (other than Scripps Chula
Vista Imaging Center, L.P.) shall sell, transfer or otherwise dispose of any of
its assets except for inventory and obsolete equipment in both cases sold in the
ordinary course of business in either case.
(c) Addition of Negative Covenants. Paragraph 6 of the Note
-------------------------------
Agreement is further amended by adding the following new paragraphs at the
end thereof:
6H. DIVIDENDS. Neither the Company nor any of its
Subsidiaries (other than Scripps Chula Vista Imaging Center, L.P.)
will declare or pay any cash dividend, purchase, redeem or
otherwise acquire for value any of its stock now or hereafter
outstanding, return any capital to stockholders, or make any
distribution of its assets to its stockholders as such; provided,
however, that the foregoing shall not prohibit any Wholly Owned
Subsidiary from paying dividends to, or making distributions or
paying management fees to, at any time and from time to time, the
Company or any other Wholly Owned Subsidiary.
-4-
<PAGE>
6I. SALE OR DISCOUNT OF RECEIVABLES. Neither the Company nor
any of its Subsidiaries (other than Scripps Chula Vista Imaging
Center, L.P.) will discount, sell or otherwise transfer, directly
or indirectly, any of their notes or accounts receivable.
6J. MAXIMUM UNLEVERAGED CAPITAL EXPENDITURES. Neither the
Company nor any of its Subsidiaries (other than Scripps Chula Vista
Imaging Center, L.P.) will make any Unleveraged Capital
Expenditures in excess of $500,000 in the aggregate during any
fiscal year.
6K. ACQUISITIONS. The Company shall not, and shall cause each
of its Subsidiaries (other than Scripps Chula Vista Imaging Center, L.P.) not
to, consummate any Acquisition without Prudential's prior written consent (which
may be given or withheld for any reason or no reason, in either case in
Prudential's sole discretion).
SECTION 3. AMENDMENT TO EVENTS OF DEFAULT.
(a) Paragraph 8A(iii) of the Note Agreement is hereby amended by
deleting "$2,500,000" and replacing it with "$50,000" (provided that
Paragraph 8A(iii) shall not be applicable with respect to those capitalized
leases referenced in Section 1 of the First Amendment to the Note Agreement
as being in default on the date of the First Amendment, but only for so
long as (and in any event not beyond January 15, 1999) and only to the
extent that the Company continues to negotiate in good faith with the
subject lessors with respect to the refinancing of the obligations under
such leases).
(b) Paragraph 8A(xiii) is amended by deleting "$1,000,000" and
replacing it with "$50,000" in each place it appears in Paragraph 8A(xiii).
SECTION 4. AMENDMENTS TO DEFINITIONS
(a) Paragraph 11B of the Note Agreement is amended by adding each
of the defined terms listed below in alphabetical order:
"CONTRACT ACCOUNTING CONTRACT" shall mean any contract or
agreement (a) whose value and related expenses are recognized by
the Company or a Subsidiary on a present value basis at the
inception of such contract or agreement (regardless of whether
rights under such contract or agreement have or have not been sold)
or (b) accounted for consistent with the Company's or a
Subsidiary's accounting policy for its long-term contracts prior to
the change in such policy, effective October 1, 1998, announced in
the Company's Form 10-Q for the fiscal quarter ended September 30,
1998.
"NOTE DOCUMENTS" shall mean this Note Agreement, the Notes,
the Subsidiary Guaranty, the Warrants, the Warrant Purchase
Agreement, the
-5-
<PAGE>
Registration Rights Agreement and all other documents heretofore,
herewith or hereafter executed in connection with the lending,
credit and security transactions described herein.
"UNLEVERAGED CAPITAL EXPENDITURES" shall mean for any period,
the total cost of capital expenditures in such period by the
Company on a consolidated basis for the purpose of acquiring, or
acquiring the use of, equipment or other tangible capital assets,
less the total amount of Funded Debt incurred in connection with
such expenditures.
(b) Paragraph 11B of the Note Agreement is further amended by
deleting in its entirety each of the defined terms listed below, as such
defined term is presently set forth in Paragraph 11B, and replacing it with
the applicable amended definition set forth below:
"EBITDA" shall mean the Company's consolidated net income,
determined in accordance with GAAP, before provision for income
taxes, interest expense, depreciation and amortization to the
extent actually deducted in arriving at net income (and in any
event before provision for that certain restructuring and
impairment expense in the amount of $5,518,489 incurred by the
Company and its consolidated subsidiaries in the fiscal quarter
ended June 30, 1998, as reported on the Company's Form 10-Q for
such quarter filed with the Securities and Exchange Commission),
minus extraordinary income, plus extraordinary loss, minus amounts
----- ---- -----
that would otherwise constitute EBITDA in the subject twelve-month
period which are derived from Contract Accounting Contracts, with
all of the foregoing being determined in accordance with GAAP, in
all cases without duplication.
(c) Paragraph 11B is further amended by deleting the following
defined terms:
"INITIAL REPORT DATE"
"EBITDA FACTOR"
"GAAP EBITDA"
"ACQUIRED EBITDA"
SECTION 6. REPRESENTATIONS AND WARRANTIES. The Company represents
and warrants as follows:
(a) Organization. The Company is a corporation duly organized
------------
and validly existing in good standing under the laws of the State of
Delaware.
(b) Power and Authority. The Company has all requisite
-------------------
corporate power to execute, deliver and perform its obligations under this
First Amendment. The execution, delivery and performance by the Company of
this First Amendment have been duly authorized by all requisite corporate
action on the part of the Company. The Company has duly executed and
delivered this First Amendment, and this First Amendment constitutes the
legal, valid and binding obligation of the Company, enforceable against the
Company in
-6-
<PAGE>
accordance with its terms.
(c) No Conflicts. Neither the execution and delivery of this
------------
First Amendment by the Company, nor the consummation of the transactions
contemplated hereby, nor fulfillment of nor compliance with the terms and
provisions hereof will conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, or result in
any violation of, or result in the creation of any security interest, lien
or other encumbrance upon any of the properties or assets of the Company
pursuant to the charter or by-laws of the Company, any award of any
arbitrator or any agreement (including any agreement with stockholders),
instrument, order, judgment, decree, statute, law, rule or regulation to
which the Company is subject.
(d) Consents. Neither the nature of the business conducted by
--------
the Company, nor any of its properties, nor any relationship between the
Company and any other Person, nor any circumstance in connection with the
transactions contemplated by this First Amendment is such as to require any
authorization, consent, approval, exemption or other action by or notice to
or filing with any court or administrative or governmental body or any
other Person in connection with the execution and delivery of this First
Amendment or fulfillment of or compliance with the terms and provisions
hereof or thereof. Provided, however, that a condition precedent to the
effectiveness of the Bank Agreement is that this First Amendment shall be
effective and satisfactory to Bank in its sole discretion.
(e) No Material Adverse Change. There has been no material
--------------------------
adverse change in the business, operations, affairs, financial condition,
assets, properties, profits or prospects of the Company and its
Subsidiaries taken as a whole since December 31, 1997, except as described
on Schedule I attached hereto.
(f) No Event of Default or Default. Immediately preceding and
------------------------------
following the effectiveness of this First Amendment, after giving effect to
the Bank Agreement, no Event of Default or Default exists except the
Reporting Defaults, the Financial Covenant Defaults and the Lease Defaults
specifically waived in Section 1.
SECTION 7. CONDITIONS TO EFFECTIVENESS. This First Amendment shall
become effective on the date hereof (the "EFFECTIVE DATE"), subject in all cases
to the following having been received by and being satisfactory to Prudential:
(a) duly executed counterparts of this First Amendment;
(b) certificate of the Secretary or Assistant Secretary of the
Company either (x) attaching and certifying copies of (i) the certificate
of incorporation of the Company, (ii) the bylaws of the Company, (iii) the
resolutions of the Board of Directors of the Company authorizing the
execution, delivery and performance of this First Amendment, and (iv) the
name, title and true signature of each officer of the Company authorized to
execute this First Amendment, or (y) certifying that there has been no
amendment to the documents referred to in clauses (i) and (ii) since the
Date of Closing and attaching and certifying copies of the
-7-
<PAGE>
documents referred to in clauses (iii) and (iv);
(c) a duly executed and delivered copy of the Bank Agreement;
(d) a written acknowledgment from Bank that all conditions
precedent to the effectiveness of the Bank Agreement have been satisfied;
(e) a favorable opinion of Greenberg Traurig, special counsel to
the Company, satisfactory to Prudential and addressing such matters as
Prudential may reasonably request;
(f) evidence satisfactory to Prudential that Prudential's special
counsel has received its fees, charges and disbursements charged or
incurred in connection with the preparation, negotiation, execution and
delivery of this First Amendment and any other documents executed and
delivered contemporaneously herewith or therewith, to the extent such fees,
charges and disbursements are reflected in a statement of such special
counsel tendered to the Company;
(g) a copy of the asset audit of the Company provided in
connection with the Bank Agreement, based on financial statements current
as of September 30, 1998, with such asset audit prepared in accordance with
GAAP and acceptable to Prudential; and
(h) an Officer's Certificate certifying that the representations
and warranties of the Company in this First Amendment and in the Note
Agreement and of the Guarantors in the Subsidiary Guaranty are true and
correct in all material respects as of the date hereof (except to the
extent that such representations and warranties related solely to an
earlier date).
SECTION 8. MISCELLANEOUS.
(a) References to Note Agreement. Upon and after the Effective
----------------------------
Date, each reference to the Note Agreement in the Note Agreement and each
other Note Document shall mean and be a reference to the Note Agreement as
amended by this First Amendment.
(b) Ratification and Confirmation. Except as specifically
-----------------------------
amended herein, the Note Agreement shall remain in full force and effect,
and is hereby ratified and confirmed.
(c) No Waiver. The execution, delivery and effectiveness of
---------
this First Amendment shall not operate as a waiver of any right, power or
remedy of Prudential or any other holder of Notes, nor constitute a waiver
of any provision of the Note Agreement, the Notes or any other Note
Document.
(d) Expenses. The Company confirms its agreement, pursuant to
--------
paragraph 12B of the Note Agreement, to pay promptly all out-of-pocket
expenses of Prudential related to this First Amendment and all matters
contemplated hereby, including, without limitation, all reasonable fees and
expenses of Prudential's special counsel.
-8-
<PAGE>
(e) Descriptive Headings. The descriptive headings of the
--------------------
several sections of this First Amendment are inserted for convenience only
and do not constitute a part of this First Amendment.
(F) GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE CONSTRUED AND
-------------
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE
GOVERNED BY, THE LAW OF THE STATE OF NEW YORK.
(g) Counterparts. This First Amendment may be executed in
------------
counterparts (including those transmitted by facsimile), each of which
shall be deemed an original and all of which taken together shall
constitute one and the same document. Delivery of this First Amendment may
be made by facsimile transmission of a duly executed counterpart copy
hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute this First Amendment as of the date first above
written.
DIAGNOSTIC HEALTH SERVICES, INC.
Name:
Title:
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
Name:
Title:
<PAGE>
The undersigned Subsidiaries of the Company hereby confirm that the
Subsidiary Guaranty continues to apply, relate, benefit and secure the Note
Agreement and the Notes, as amended by this First Amendment.
DHS MANAGEMENT SERVICES, INC.
MOBILE DIAGNOSTIC SYSTEMS, INC.
HEART INSTITUTE OF TULSA, INC.
SPECIALIZED IMAGING SERVICES INC.
MOBILE DIAGNOSTIC IMAGING, INC.
ST. LOUIS MOBILE ULTRASOUND, INC.
ADVANCED DIAGNOSTIC IMAGING, INC.
PEDIATRIC ECHOCARDIOGRAPHIC
DIAGNOSTIC IMAGING, INC.
ULTRASOUND DIAGNOSTIC SERVICES, LTD.
SOCAL DIAGNOSTIC SERVICES, INC.
CARDIAC CONCEPTS, INC.
HOMECARE INTERNATIONAL, INC.
SOCAL SUBSIDIARY I, INC.
SOCAL SUBSIDIARY II, INC.
SONOMED, INC.
By:__________________________________
Name: Brad A. Hummel
Title: President
ALPHA SCANNING SERVICE, INC.,
a Louisiana corporation
By:__________________________________
Name: Brad A. Hummel
Title: Chief Operating Officer
<PAGE>
SANTA MONICA IMAGING CENTER LIMITED
PARTNERSHIP
By: SoCal Subsidiary I, Inc., its
General Partner
By:_______________________________________
Name: Brad A. Hummel
Title: President
DIAGNOSTIC HEALTH SERVICES DE MEXICO,
S.A. de C.V., a corporation incorporated under
the laws of the Republic of Mexico
By:____________________________________________
Name: Brad A. Hummel
Title: Director
<PAGE>
Exhibit 10.20
DIAGNOSTIC HEALTH SERVICES, INC.
2777 Stemmons Freeway, Suite 1525
Dallas, Texas 75207
January 8, 1999
Mr. Max W. Batzer
4215 Cochran Chapel Road
Dallas, TX 75209
Dear Max:
This letter will confirm our agreement with respect to the modified terms
of your employment with Diagnostic Health Services, Inc. (the "Company"), from
and after the Effective Date set forth below. This agreement expressly
supersedes in its entirety your outstanding employment agreement with the
Company dated November 1, 1991 (as heretofore amended from time to time), which
existing agreement shall be of no further or effect from and after such
Effective Date.
Effective upon the execution and delivery of this agreement (the "Effective
Date," except that the modification of your compensation reflected in this
agreement shall not become effective until January 15, 1999), your employment
with the Company will be on the following terms and conditions:
1. Nature of Employment.
--------------------
(a) You will be employed as, and will serve with the title of,
Chairman of the Company, in which capacity you will perform such reasonable
executive-level duties and responsibilities as may reasonably be requested from
time to time by the Board of Directors of the Company (the "Board") and the
Chief Executive Officer of the Company; provided, however, that you will not
-------- -------
have any responsibilities related to the Company's daily operations, and you
will not have direct supervision of any Company personnel other than as and to
the extent required in your capacity as the Chairman of the Company, Chairman of
the Board, or as a member of the Board. Throughout the term of this agreement,
for so long as you are ready, willing and able to serve, the Company will cause
you to be included in management's slate of nominees for each election of
directors of the Company, and, in addition to your title as "Chairman of the
Company," you may, as long as you are serving as a director of the Company and
prior to any "change in control" or "material stock event" (as such terms are
defined in paragraph 3(f) below), retain the title of "Chairman of the Board" of
the Company. Furthermore, throughout the term of this Agreement, for so long as
you continue to serve as a director of the Company, the Company will not, in the
absence of good cause, take any action to remove you from any committee of the
Board on which you are now serving.. Anything elsewhere contained in this
agreement to the contrary notwithstanding, (i) you may at any time, in your sole
and absolute discretion, resign as a director and/or officer of the Company
without affecting your status as an employee of the Company or your rights and
benefits as an employee, under this
<PAGE>
agreement, or under any stock option, and (ii) in the event of any "change in
control" or "material stock event" (as such terms are defined in paragraph 3(f)
below), (A) the Company may require you to relinquish the title of "Chairman of
the Board" at any time thereafter, and (B) the Company or you may, at its or
your option at any time thereafter, change your title and position from
"Chairman of the Company" to another mutually agreeable title and position,
without affecting your status as an employee of the Company or your rights and
benefits as an employee, under this agreement, or under any stock option.
(b) In performing your assigned duties hereunder, you will (i) devote
such portion of your business time as may be necessary for the performance of
such duties, (ii) observe and carry out such reasonable rules, regulations,
policies, directions and restrictions as may be established from time to time by
the Board, and (iii) do such travelling as may reasonably be required in
connection with the performance of such duties. Subject to the foregoing, you
will have substantial discretion as to the manner in which you perform your
services hereunder (i.e., in person, by phone, by fax or e-mail, etc.), and as
to the specific hours of your attendance at the Company's offices.
(c) In order to assist you in performing your duties hereunder, the
Company will provide you with an office at the Company's headquarters (which may
not necessarily be the same office which you presently occupy, but will be a
mutually reasonably agreeable exterior office with a window on the same floor as
other senior executives) or, at your option, at another office of the Company or
one of its subsidiaries, and with reasonable support services, including shared
secretarial support, support staff, office facilities, telephone facilities as
generally available to other senior executives, a computer terminal in your
office linked to the local area network and its software capabilities, and the
computer hardware currently in place at your home.
(d) The Company acknowledges your stated desire to develop business
interests outside of the Company, and that this may require significant portions
of your business time at times which might conflict with your performance of
assigned duties for the Company. We hereby agree to work with one another to
balance these respective interests, and your devotion of substantial time to
such outside business interests will not be deemed a breach or violation of this
agreement, so long as such outside business interests do not constitute or
entail a violation of paragraph 5 below.
2. Term of Agreement.
-----------------
(a) Subject to prior termination in accordance with the further
provisions of this paragraph 2, the term of this agreement will begin on the
Effective Date and thereafter continue through and including December 31, 2001.
(b) Anything contained in paragraph 2(a) above to the contrary
notwithstanding, the Company will have the right to terminate this agreement,
effective upon written notice to you, in the event that (i) you commit any
fraud, criminal misconduct, self-dealing or gross or willful misconduct from and
after the date hereof in connection with the
2
<PAGE>
performance of your duties and responsibilities hereunder, (ii) you become
physically or mentally disabled or impaired so as to prevent you from continuing
the performance of substantially all of your duties and responsibilities
hereunder for a period in excess of one (1) year, (iii) you willfully fail or
refuse (other than on account of illness or other disability) to devote such
reasonable amount of time and effort as may be required to perform your assigned
duties hereunder, and such breach is not cured within sixty (60) days after
written notice thereof to you, (iv) you willfully fail or refuse to observe or
carry out such reasonable rules, regulations, policies, directions and/or
restrictions as may from time to time be established by the Board, and such
breach is not cured within sixty (60) days after written notice thereof to you,
or (v) you willfully commit any other material breach of any of the material
provisions of this agreement, and such breach is not cured within sixty (60)
days after written notice thereof to you. As used herein, acts or omissions
shall be deemed to have been "willful" if done with knowledge of impropriety or
intent to harm the Company or any of its subsidiaries, or without reasonable
good faith belief as to the propriety thereof. Any termination of this agreement
pursuant to paragraph 2(b)(ii) shall not be deemed a termination for cause for
any purpose.
(c) Anything contained in paragraph 2(a) above to the contrary
notwithstanding, you may terminate this agreement, effective upon written notice
to the Company, in the event that the Company willfully commits any material
breach of any of the material provisions hereof, and such breach is not cured
within sixty (60) days after written notice thereof to the Company. For
purposes hereof, acts or omissions shall be deemed to have been "willful" if
done with knowledge of impropriety or intent to harm you or without reasonable
good faith belief as to the propriety thereof. For purposes of stock options,
any proper termination of this agreement pursuant to this paragraph 2(c) shall
be deemed to have been done with the Company's consent in writing (as evidenced
by this agreement, and regardless of the absence of any subsequent written
confirmation).
(d) This agreement will automatically terminate upon your death, and
such termination shall not be deemed a termination for cause for any purpose.
(e) Upon any termination of this agreement as hereinabove provided,
you will be entitled to receive any and all unpaid compensation appropriately
prorated to and as of the effective date of termination (based on the number of
days elapsed prior to the date of termination), and any other amounts then due
and payable to you hereunder; provided, however, that in the event that you
-------- -------
terminate this agreement pursuant to paragraph 2(c) above, then the Company will
continue to be obligated to pay and provide to you all sums, consideration,
compensation and benefits hereunder for the remainder of the stated term of this
agreement (it being understood that you will be under no obligation to seek or
obtain other full-time employment under such circumstances, and that any
compensation received by you from other employment shall not reduce the sums,
consideration, compensation and benefits payable by the Company hereunder,
except that the Company will not be required to overlap its benefits with any
other similar or duplicate benefits which you receive from other employment).
Except as provided in the foregoing proviso, all payments under this paragraph
-------
2(e) shall be made on the next applicable payment date therefor (as provided in
paragraph 3 below) following the effective date of termination. Such payments
shall constitute all amounts to which you will be entitled
3
<PAGE>
upon termination of this agreement (other than a termination pursuant to
paragraph 3(f) below, the terms of which shall govern payment upon any
termination thereunder), provided that any termination (including, without
limitation, any termination under paragraph 3(f) below) shall be without
prejudice to your rights under any pension plan (subject to the terms of such
plan) and your "COBRA" rights for continued benefits from and after the
effective date of such termination, and, unless termination is pursuant to
paragraph 2(c) above (in which event the Company will be required to provide
continued benefits hereunder in accordance with paragraph 2(c)), you will have
the right to maintain (subject to payment of ongoing premiums) any life
insurance policies maintained by the Company on your life (other than "key man"
policies pledged to any lender) and/or disability policies (to the extent
assignable) in effect at the time of termination. Furthermore, subject to the
terms and conditions of the applicable plan or agreement, termination shall not
affect your rights under any stock option plan or stock option agreement
outstanding at the time of termination, and the effect of termination shall be
governed by the terms and conditions of such plans and agreements.
3. Compensation and Benefits.
-------------------------
(a) The Company will pay to you the sum of $250,000 per annum during
the term of this agreement, of which $50,000 per annum is designated as
compensation for ongoing services, and the balance of which shall be treated as
consideration for the restructuring of your existing employment arrangements
with the Company. Such payments shall be made in equal semi-monthly
installments during the term of this agreement, subject to required tax, payroll
and other legally required withholdings. Notwithstanding the foregoing
designations, your salary for employee benefit calculations (including any 401k
plans), credit reporting and other purposes shall be $250,000 per annum.
(b) In addition to the compensation under paragraph 3(a), the Company
will pay to you the sum of $2,400 per month as an all-inclusive expense
allowance, including (without limitation) all expenses relating to automobile
leasing, gasoline and other automotive expenses; and, in this regard, if the
Company is unable to effect a valid assignment (with a release of the Company
from all ongoing obligations) of the outstanding lease in respect of the
automobile currently leased by the Company for you, then the Company shall have
the right to withhold on a monthly basis from such monthly expense allowance,
and pay to the applicable leasing company, amounts sufficient to make the
required payments under such automobile lease as and when due. You will not be
accountable to the Company for the specific expenditures of such monthly expense
allowance, provided that you will be responsible for reporting same on your
personal tax returns and paying any required taxes thereon.
(c) The Company will continue to provide you with normal employee
benefits, including but not limited to health and disability insurance for you
and your dependents, as generally provided by the Company to its employees from
time to time; and, in this regard, (i) to the extent that the Company maintains
its current benefit plans and policies, same will be available to you in a
manner substantially consistent with that currently in effect, and (ii) the
Company will continue to maintain, during the period of your employment
hereunder, life insurance on your life (other than "key man" coverage pledged to
a lender, which shall be in the
4
<PAGE>
Company's discretion) in amounts and on terms and conditions substantially
equivalent to such insurance as currently in effect (with the proceeds thereof
to be payable to such beneficiary or beneficiaries as you may designate from
time to time). Without limitation of the foregoing, so long as the Company
continues to provide and maintain the health and disability insurance that it
currently provides for Brad A. Hummel (or any successor Chief Executive Officer)
and his dependents, the Company will continue to provide and maintain for you
and your dependents the same health and disability insurance coverage which it
currently provides and maintains for you and your dependents. You will not,
however, be entitled to any payments for unused vacation time or other unused
time off. Furthermore, during the period of your employment hereunder, you will
continue to be eligible to participate in any employee benefit plan, pension
plan, group life, health or accident insurance, incentive plans, or other such
plan or policy which may be maintained by the Company from time to time for the
benefit of its employees (all subject to the terms and conditions of such plans
and policies).
(d) In addition to the expense allowance under paragraph 3(b) above,
the Company will reimburse you, upon presentment of appropriate receipts and
vouchers, for any out-of-town travel, lodging, meals and other such expenses
which you may incur in connection with the performance of duties specifically
assigned to you hereunder which require such expenditures.
(e) The Company hereby acknowledges that this agreement does not
constitute an interruption or termination of your employment within the meaning
of any stock option plans and/or stock option agreements currently outstanding,
and that the execution and delivery of this agreement shall not impair of modify
any of your rights under any such stock option plans or stock option agreements.
Furthermore, subject to the terms and conditions of such plans, you will
continue to eligible for grants under stock option plans of the Company now in
effect or which hereafter may be adopted by the Company.
(f) In the event that, at any time and from time to time from and
after the date hereof, there shall occur any "change in control" of the Company
or any "material stock event" (as each such term is hereinafter defined), the
Company shall have the option, exercisable at any time within six (6) months
after such "change in control" or "material stock event," to terminate this
agreement upon payment to you of an amount equal to the greater of (i) the sum
of $600,000, plus all remaining payments thereafter payable pursuant to
paragraph 3(b) above (such payments under paragraph 3(b) to be discounted at an
annual rate of six (6%) percent per annum), or (ii) the sum of all remaining
payments thereafter payable pursuant to paragraphs 3(a) and 3(b) above, all
discounted at an annual rate of six (6%) percent per annum. Any termination
under this paragraph 3(f) shall (i) be subject to the last two sentences of
paragraph 2(e) above, and (ii) not be deemed or treated as a termination for
cause; and, following any termination under this paragraph 3(f), the Company
will permit you to have the continued use of your office and related support
services pursuant to paragraph 1(c) above for a period of sixty (60) days
following the date of termination. As used herein, the term "change in control"
means any transaction or series of transactions whereby 20% or more of the total
outstanding votes eligible to vote for directors of the Company (or any
successor by merger, consolidation or otherwise) shall be owned (legally or
beneficially) by any person (or persons acting in concert) who is not a
stockholder of the
5
<PAGE>
Company on and as of the date hereof (with the "change in control" being deemed
to have taken place on the first date that such ownership shall exist); and the
provisions hereof shall apply to successive "changes in control" as same may
occur during the term of this agreement. As used herein, the term "material
stock event" means any transaction or series of related transactions whereby the
Company, in connection with any business acquisition, business combination,
joint venture or other such transaction, issues a number of shares of its common
stock equal to or greater than 30% of the number of shares of common stock of
the Company outstanding immediately prior to such transaction or series of
related transactions; and the provisions hereof shall apply to successive
"material stock events" as same may occur during the term of this Agreement.
4. Vacation. You will be permitted to take vacations from time to time,
--------
at such times and for such periods of time as you may determine in your sole
discretion, subject to any specific prior commitments that you may have made to
or on behalf of the Company.
5. Restrictive Covenants.
---------------------
(a) In consideration of the undertakings of the Company set forth
herein, and the compensation and benefits to be provided to you by the Company
hereunder, you agree that you will not, (i) during the period of your employment
hereunder, have any interest of any kind in any business which is engaged in the
rendering of diagnostic imaging or other services then rendered by the Company
or any of its subsidiaries, and is located or operating in any State in which
the Company or any of its subsidiaries is then conducting operations or has
expended significant time, expense or effort for the purpose of establishing
business operations, (ii) during the period of your employment hereunder,
solicit or seek, on behalf of any business enterprise (other than the Company or
any of its subsidiaries) which is engaged in the rendering of diagnostic imaging
or other services then rendered by the Company or any of its subsidiaries, (A)
to perform any diagnostic imaging or other services (as hereinabove described)
for or with any patients, clients or customers of the Company or any of its
subsidiaries, or (B) to obtain referrals for any diagnostic imaging or other
services (as hereinabove described) from any active referral sources of the
Company or any of its subsidiaries, (iii) during the period of your employment
hereunder, solicit, entice, induce or seek to hire any of the employees of the
Company or any of its subsidiaries to work in or consult with any business which
is engaged in the rendering of diagnostic imaging or other services then
rendered by the Company or any of its subsidiaries, and is located or operating
in any State in which the Company or any of its subsidiaries is then conducting
operations or has expended significant time, expense or effort for the purpose
of establishing business operations, and (iv) either during the period of your
employment hereunder or at any time thereafter, disclose to any person, firm,
corporation or entity, to the detriment or possible detriment of the Company or
any of its subsidiaries, any confidential information concerning or relating to
the business, operations, affairs, practices, procedures, policies or methods of
the Company or any of its subsidiaries which you may previously have acquired or
may hereafter acquire in the course of your employment hereunder.
(b) Anything contained in paragraph 5(a) above to the contrary
notwithstanding, (i) you may at any time have passive investments (i.e.,
investments not
6
<PAGE>
involving management, employment or consulting services by you or any of your
affiliates) in not more than 5% of the outstanding securities of any publicly
traded entity which is engaged in the rendering of diagnostic imaging or other
services rendered by the Company or any of its subsidiaries, and (ii) the
restrictions set forth in subparagraphs (i), (ii) and (iii) of paragraph 5(a)
above shall not be applicable subsequent to any proper termination of this
agreement by you pursuant to paragraph 2(c) above.
(c) We both understand and acknowledge that the foregoing
restrictions are reasonable and necessary, in terms of the time, geographic
scope and nature of the restrictions, for the protection of the Company and its
business and good will. Nonetheless, in the event that the scope, nature or
duration of any of the limitations contained herein exceed those permitted by
law (as determined by a court of competent jurisdiction), then such limitations
shall be deemed to be modified in scope and effect, and as to time, geographical
area and/or application to given circumstances, to the extent required by law to
render same enforceable, and the remainder of this agreement shall be
unaffected. In the event of any breach or threatened breach of any of the
limitations contained herein, it is acknowledged that the Company will not have
an adequate remedy at law, and the Company will be entitled to seek and obtain
appropriate injunctive relief to restrain such breach and/or to compel
compliance herewith.
6. Company Property.
----------------
(a) You hereby acknowledge and confirm that all ideas, inventions and
other developments or improvements conceived by you, whether alone or with
others, during the term of your employment hereunder (whether or not during
working hours), that are within the scope of the business operations of the
Company or any of its subsidiaries or that relate to any business of any type
conducted or proposed to be conducted by the Company or any of its subsidiaries,
constitute the exclusive property of the Company or the subject subsidiary. You
will assist the Company or its subsidiaries (as applicable) as required in order
to establish, confirm and evidence the Company's or its subsidiary's ownership
of such ideas, developments and improvements, and will execute and deliver any
and all such agreements, instruments and other documents as may be necessary or
appropriate in connection therewith.
(b) Upon termination of this agreement under any circumstances, and
otherwise upon request of the Company or any of its subsidiaries, you will
immediately return all property of the Company and/or its subsidiaries utilized
by you in rendering services hereunder, to the extent in your possession or
under your control.
7. Waivers and Amendments. None of the terms or conditions of this
----------------------
agreement may be waived, amended or modified except by means of a written
instrument signed by the party to be charged therewith. Not failure or delay on
the part of either party in respect of any enforcement of obligations hereunder
shall in any manner affect such party's rights to seek or effect enforcement at
any other time or in respect of any other required performance.
8. Successors and Assigns. This agreement shall be binding upon and
----------------------
shall inure to the benefit of us and our respective heirs, executors,
administrators, representatives, successors and assigns (including, without
limitation, any purchaser(s) of the business of the Company,
7
<PAGE>
howsoever such purchase may be effected, or any successor by merger). Without
limitation of the foregoing, neither the Company nor any successor in interest
shall effect any sale of any substantial portion of its business by sale of
assets unless, concurrently with the consummation of such transaction, the
purchaser(s) of such assets expressly agrees in writing to assume all of the
Company's or such successor's obligations hereunder and the Company agrees to
remain jointly and severally liable hereunder with such purchaser(s). Further,
subject to any express terms or conditions of any such stock options, the
Company shall not merge into, consolidate with, or sell or otherwise transfer
all or substantially all of its assets to another corporation without making
provision, pursuant to the terms of the transaction, for (a) the assumption by
the surviving, resulting or acquiring corporation of any then-outstanding stock
options of the Company then held by you, or (b) the substitution of new options
for any such stock options.
9. Governing Law. This agreement shall be governed by and construed in
-------------
accordance with the substantive laws of the State of Texas, without giving
effect to principles of conflicts of law.
10. Attorneys' Fees. Upon your execution and delivery of this agreement,
---------------
the Company will pay to you the sum of $10,000 in respect of attorneys' fees
incurred by you in connection with the review and negotiation of this agreement
on your behalf.
If the foregoing accurately reflects our entire agreement and understanding
as to the subject matter hereof, kindly acknowledge same by countersigning and
returning to the Company a duplicate copy of this letter.
Very truly yours,
DIAGNOSTIC HEALTH SERVICES, INC.
By:______________________________
Brad A. Hummel, President
Acknowledged, Accepted
and Agreed to:
_______________________
Max W. Batzer
8
<PAGE>
EXHIBIT 10.21
AGREEMENT AND PLAN OF MERGER
dated as of February 18, 1999
Among
DIAGNOSTIC HEALTH SERVICES, INC.,
MAI ACQUISITION CORP.,
and
MEDICAL ALLIANCE, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
TABLE OF DEFINITIONS........................................................ v
ARTICLE I THE MERGER.................................................. 2
Section 1.01 The Merger.............................................. 2
Section 1.02 Conversion of Shares.................................... 2
Section 1.03 Surrender and Payment................................... 4
Section 1.04 Stock Option Plans...................................... 6
Section 1.05 MAI Warrants............................................ 7
Section 1.06 Fractional Shares....................................... 7
ARTICLE II THE SURVIVING CORPORATION................................... 8
Section 2.01 Article of Incorporation................................ 8
Section 2.02 By-Laws................................................. 8
ARTICLE III REPRESENTATIONS AND WARRANTEES OF MAI....................... 8
Section 3.01 Organization and Power.................................. 8
Section 3.02 Corporate Authorization................................. 9
Section 3.03 Governmental Authorization.............................. 9
Section 3.04 Non-Contravention....................................... 10
Section 3.05 Capitalization of MAI................................... 10
Section 3.06 Capitalization of Subsidiaries.......................... 11
Section 3.07 SEC Filings............................................. 11
Section 3.08 Financial Statements.................................... 12
Section 3.09 Information Supplied.................................... 13
Section 3.10 Absence of Certain Changes.............................. 13
Section 3.11 No Undisclosed Liabilities.............................. 14
Section 3.12 Litigation.............................................. 14
Section 3.13 Taxes................................................... 15
Section 3.14 Employee Benefit Plans; ERISA........................... 17
Section 3.15 Certain Agreements; Compliance with Agreements.......... 18
Section 3.16 Compliance with Laws and-Orders......................... 20
Section 3.17 Environmental Matters................................... 20
Section 3.18 Assets.................................................. 21
Section 3.19 Intellectual Property Rights............................ 22
Section 3.20 Labor Matters........................................... 22
Section 3.21 Transactions with Affiliates............................ 23
Section 3.22 Insurance............................................... 23
i
<PAGE>
Section 3.23 Takeover Statutes....................................... 23
Section 3.24 Finders' Fees........................................... 24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF DHS....................... 24
Section 4.01 Organization and Power.................................. 24
Section 4.02 Corporate Authorization................................. 24
Section 4.03 Governmental Authorization.............................. 25
Section 4.04 Non-Contravention....................................... 25
Section 4.05 Capitalization of DHS................................... 25
Section 4.06 Capitalization of Subsidiaries.......................... 26
Section 4.07 SEC Filings............................................. 27
Section 4.08 Financial Statements.................................... 27
Section 4.09 Information Supplied.................................... 28
Section 4.10 Absence of Certain Changes.............................. 28
Section 4.11 No Undisclosed Liabilities.............................. 29
Section 4.12 Litigation.............................................. 30
Section 4.13 Taxes................................................... 30
Section 4.14 Employee Benefits; ERISA................................ 32
Section 4.15 Certain Agreements; Compliance with Agreements.......... 33
Section 4.16 Compliance with Laws and Orders......................... 35
Section 4.17 Environmental Matters................................... 35
Section 4.18 Assets.................................................. 36
Section 4.19 Intellectual Property Rights............................ 36
Section 4.20 Labor Matters........................................... 36
Section 4.21 Transactions with Affiliates............................ 37
Section 4.22 Insurance............................................... 37
Section 4.23 Takeover Statutes....................................... 38
Section 4.24 Finders' Fees........................................... 38
ARTICLE V COVENANTS................................................... 38
Section 5.01 Conduct of MAI.......................................... 38
Section 5.02 Conduct of DHS.......................................... 40
Section 5.03 No Solicitation......................................... 42
Section 5.04 Approval of Stockholders................................ 44
Section 5.05 Preparation of Form S-4 and Proxy Statement............. 45
Section 5.06 Access to Information................................... 46
Section 5.07 Notices of Certain Events............................... 47
Section 5.08 Regulatory and Other Approvals.......................... 47
Section 5.09 Public Announcements.................................... 48
Section 5.10 Further Assurances...................................... 48
Section 5.11 MAI Affiliates.......................................... 48
Section 5.12 Obligations of Merger Subsidiary........................ 49
Section 5.13 Listing of Stock........................................ 49
ii
<PAGE>
Section 5.14 Antitakeover Statutes................................... 49
Section 5.15 Tax Treatment........................................... 49
Section 5.16 Appointment of Directors................................ 49
Section 5.17 Director and Officer Indemnification.................... 50
Section 5.18 Employee Benefits....................................... 50
Section 5.19 Good Faith Efforts...................................... 50
ARTICLE VI GENERAL CONDITIONS PRECEDENT TO THE MERGER.................. 51
Section 6.01 Stockholder Approval.................................... 51
Section 6.02 HSR Act................................................. 51
Section 6.03 Registration Statements; State Securities Laws.......... 51
Section 6.04 Listing................................................. 51
Section 6.05 Suits or Other Proceedings.............................. 51
Section 6.06 Employment Agreements................................... 52
Section 6.07 Pooling Letters......................................... 52
ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF DHS AND
MERGER SUBSIDIARY........................................... 52
Section 7.01 Representations and Warranties.......................... 52
Section 7.02 Performance of Obligations.............................. 52
Section 7.03 No Material Adverse Change.............................. 52
Section 7.04 Consents................................................ 53
Section 7.05 Opinion of MAI Counsel.................................. 53
Section 7.06 Proceedings............................................. 53
Section 7.07 Fairness Opinion........................................ 53
ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MAI.............. 53
Section 8.01 Representations and Warranties.......................... 53
Section 8.02 Performance of Obligations.............................. 54
Section 8.03 No Material Adverse Change.............................. 54
Section 8.04 Consents................................................ 54
Section 8.05 Opinion of DHS Counsel.................................. 54
Section 8.06 Proceedings............................................. 54
Section 8.07 Tax Opinion............................................. 54
Section 8.08 Fairness Opinion at or prior to the Closing............. 55
Section 8.09 Accounting Matters...................................... 55
Section 8.10 DHS First Quarter Results............................... 55
Section 8.11 Waivers from Lenders.................................... 55
ARTICLE IX TERMINATION................................................. 55
Section 9.01 Termination............................................. 55
Section 9.02 Effect of Termination................................... 56
iii
<PAGE>
ARTICLE X MISCELLANEOUS............................................... 57
Section 10.01 Notices................................................. 57
Section 10.02 Entire Agreement Non-Survival of Representations and
Warranties: Third Party Beneficiaries................... 58
Section 10.03 Amendment............................................... 59
Section 10.04 Waiver.................................................. 59
Section 10.05 Expenses................................................ 59
Section 10.06 Successors and Assigns.................................. 59
Section 10.07 Governing Law........................................... 60
Section 10.08 Jurisdiction............................................ 60
Section 10.09 Counterparts: Effectiveness............................. 60
Section 10.10 Interpretation.......................................... 60
Section 10.11 Severability............................................ 60
Section 10.12 Specific Performance.................................... 60
Section 10.13 Performance by Merger Subsidiary........................ 61
EXHIBITS
Voting Agreement............................................................ A
Affiliate Letter............................................................ B
Registration Rights Agreement............................................... C
Opinion of MAI Counsel...................................................... D
Opinion of DHS Counsel...................................................... E
iv
<PAGE>
TABLE OF DEFINITIONS
Term Section
- ---- -------
1933 Act 3.03
1934 Act 3.03
Adjusted Option 1.04(a)
Affiliate Letter 5.11
Alternative Proposal 5.03(a)
Antitrust Division 5.08
Closing 1.01(b)
Closing Date 1.01(b)
Code recitals
Confidentiality Agreement 5.06(a)
Delaware Law 4.23
DHS preamble
DHS 10-K 4.08
DHS Agreement 4.04
DHS Balance Sheet 4.08
DHS Balance Sheet Date 4.08
DHS Benefit Plans 4.14(a)
DHS Common Stock 1.02(a)
DHS Disclosure Letter 2.03
DHS ERISA Affiliate 4.14(a)
DHS Financial Statements 4.08
DHS Group 4.13(1)
DHS Holders recitals
DHS Options 4.05(a)
DHS Permits 4.16
DHS Plans 4.05(a)
DHS Preferred Stock 4.05(a)
DHS Proposal 5.03(b)
DHS SEC Documents 4.07(a)
DHS Securities 4.05(a)
DHS Stockholders' Approval 5.03(b)
DHS Stockholders' Meeting(s) 5.03(b)
DHS Subsidiary Securities 4.06
DHS Tax Returns 4.13
Effective Time 1.01(c)
Environmental Laws 3.17(b)
Environmental Liabilities 3.17(b)
ERISA 3.14(a)
Exchange Agent 1.03(a)
Form S-4 3.09
FTC 5.08
v
<PAGE>
Term Section
- ---- -------
GAAP 3.08
Governmental Authorities 3.03
Hazardous Substance 3.17(b)
HSR Act 3.03
Indemnified Persons 5.17
Intellectual Property 3.19(a)
Laws 3.04
Lien 3.04
MAI preamble
MAI 10-K 3.08
MAI Affiliates 5.11
MAI Agreement 3.04
MAI Balance Sheet Date 3.08
MAI Balance Sheet 3.08
MAI Benefit Plans 3.14(a)
MAI Common Stock 1.02(a)
MAI Disclosure Letter 3.01
MAI ERISA Affiliate 3.14(a)
MAI Financial Statements 3.08
MAI Group 3.13(i)
MAI Holders recitals
MAI Option Plan 1.04(a)
MAI Permits 3.16
MAI SEC Documents 3.07(a)
MAI Securities 3.05(a)
MAI Stock Option 1.04(a)
MAI Stockholders' Approval 5.03(a)
MAI Stockholders' Meeting 5.04(a)
MAI Subsidiary Securities 3.06
MAI Tax Returns 3.13(a)
Material Adverse Effect 3.01
Merger 1.01(a)
Merger Consideration 1.02(c)
Merger Subsidiary preamble
Most Recent DHS Balance Sheet 4.08(b)
Most Recent MAI Balance Sheet 3.08(b)
Name Change 5.04(b)
Notice of Superior Proposal 5.04(a)
Orders 3.04
Person 1.02(d)
Proxy Statement 3.09
Qualified Stock Options 1.04(a)
SEC 3.07(a)
vi
<PAGE>
Term Section
- ---- -------
Service 3.13(h)
Share(s) 1.02(a)
Stockholders recitals
Stockholders' Meetings 5.04(b)
Subsidiary 1.02(d)
Subsidiary of MAI 3.17(b)
Superior Proposal 5.03(a)
Surviving Corporation 1.01(a)
Takeover Statute 3.23
Tax Return 3.13(1)
Taxes 3.13(1)
Taxing Authority 3.13(1)
Texas Law 1.01(a)
Voting Agreement recitals
vii
<PAGE>
EXHIBIT 10.21
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER dated as of February 18, 1999 among DIAGNOSTIC
HEALTH SERVICES, INC., a Delaware corporation ("DHS"), MAI ACQUISITION CORP., a
Texas corporation and a wholly-owned Subsidiary of DHS ("Merger Subsidiary"),
and MEDICAL ALLIANCE, INC., a Texas corporation ("MAI")
W I T N E S S E T H:
--------------------
WHEREAS, DHS and its Subsidiaries are engaged primarily in the provision of
outsourced medical support services and equipment to hospitals, physician
offices and other health care facilities, and MAI and its Subsidiaries are
engaged primarily in the provision of services used to create temporary surgical
environments in physician offices; and
WHEREAS, the respective Boards of Directors of DHS and MAI have approved,
and deem it advisable and in the best interests of their respective stockholders
to consummate, the acquisition of MAI by DHS by means of a merger of Merger
Subsidiary into MAI, as a result of which MAI will become a wholly-owned
subsidiary of DHS, all on the terms and conditions set forth herein; and
WHEREAS, for United States federal income tax purposes, it is intended that
the Merger contemplated by this Agreement qualify as a "reorganization" within
the meaning of Section 368 of the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder (the "Code"); and
WHEREAS, as a condition and inducement to DHS entering into this Agreement
and incurring the obligations set forth herein, concurrently with the execution
and delivery of this Agreement, DHS is entering into a Voting Agreement with
Mapleleaf Capital, Ltd., Sunwestern Cayman 1998 Partners, Sunwestern Investment
Fund III, Paul R. Herchman, Gary B. Hill, David A. Kallenberger, Thomas A.
Montgomery, Leon Pritzker and Tony LeVecchio (collectively, the "MAI Holders")
and Max W. Batzer, Brad A. Hummel, James R. Angelica, Thomas M. Sestak, Bo W.
Lycke and Bonnie G. Lankford (collectively, the "DHS Holders," and collectively
with the MAI Holders, the "Stockholders"), in the form of Exhibit A hereto (the
---------
"Voting Agreement") pursuant to which, among other things, the MAI Holders have
agreed to vote the shares of MAI Common Stock owned by them in favor of this
Agreement and the Merger, the Name Change and other transactions provided for
herein, and the DHS Holders have agreed to vote the shares of DHS Common Stock
owned by them in favor of the issuance of shares of DHS Common Stock pursuant to
the Merger, the Name Change and the other transactions contemplated by the
Merger.
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants and agreements set forth herein and in
the Voting Agreement, the parties hereto, intending to be legally bound hereby,
agree as follows:
<PAGE>
ARTICLE I
THE MERGER
Section 1.01 The Merger.
----------
(a) Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time, Merger Subsidiary shall be merged (the
"Merger") with and into MAI in accordance with the Texas Business Corporation
Act (the "Texas Law"), whereupon the separate existence of Merger Subsidiary
shall cease, and MAI shall continue as the surviving corporation (the "Surviving
Corporation").
(b) Upon the terms and subject to the conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at 10:00
a.m. on a date to be specified by the parties (the "Closing Date"), which shall
be no later than the fifth business day after satisfaction of the conditions set
forth in Article VI, at the offices of Jackson Walker L.L.P. in Dallas, Texas,
unless another time, date or place is agreed to in writing by the parties
hereto.
(c) Upon the Closing, MAI and Merger Subsidiary will file
articles of merger with the Secretary of State of the State of Texas and make
all other filings or recordings required by Texas Law in connection with the
Merger. The Merger shall become effective at such time as the articles of merger
are duly filed with the Secretary of State of the State of Texas or at such
later time as is agreed by DHS and MAI and specified in the articles of merger
(the "Effective Time").
(d) The Merger shall have the effects set forth in Section 5.04
of the Texas Law.
(e) Each party hereto will, either prior to or after the
Effective Time, execute such further documents, instruments, deeds, bills of
sale, assignments and assurances and take such further actions as may reasonably
be requested by one or more of the other parties to consummate the Merger, to
vest the Surviving Corporation with full title to all assets, properties,
privileges, rights, approvals, immunities and franchises of Merger Subsidiary or
MAI, or to effect the other purposes of this Agreement.
Section 1.02 Conversion of Shares.
--------------------
(a) At the Effective Time, by virtue of the Merger and without
any action on the part of the holder of any common stock of MAI or Merger
Subsidiary:
(i) each share of Common Stock, par value $0.002 per share, of
MAI (the "MAI Common Stock") held by MAI as treasury stock or owned by DHS
or any Subsidiary of DHS immediately prior to the Effective Time shall
automatically be canceled and retired without any conversion thereof, and
no DHS Common Stock or other consideration shall be delivered in exchange
therefor;
2
<PAGE>
(ii) each share of common stock, par value $0.01 per share, of
Merger Subsidiary outstanding immediately prior to the Effective Time shall
automatically be converted into and become one share of common stock of the
Surviving Corporation and shall constitute the only outstanding shares of
capital stock of the Surviving Corporation; and
(iii) each share (each, a "Share" and collectively, the "Shares")
of MAI Common Stock outstanding immediately prior to the Effective Time
shall, except as otherwise provided in Section 1.02(a)(i), automatically be
converted into the right to receive 1.57 shares of fully paid and non-
assessable Common Stock, par value $0.001 per share of DHS (the "DHS Common
Stock"); provided, however, that the foregoing conversion ratio shall be
-------- -------
(A) appropriately adjusted in the event that there shall occur any stock
dividend, stock split, combination of shares, recapitalization or other
such event relating to the DHS Common Stock or the MAI Common Stock between
the date hereof and the Effective Time, (B) proportionately increased or
decreased (as the case may be) in the event and to the extent that the
number of outstanding shares of DHS Common Stock shall, at the Effective
Time, be greater than or less than the number of outstanding shares of DHS
Common Stock on the date hereof, other than increases resulting from the
exercise of options or warrants that are outstanding on the date hereof or
hereafter issued in accordance with Section 5.02(f) and from the conversion
of any DHS Preferred Stock (including additional shares of DHS Preferred
Stock which may hereafter accrue as in-kind dividends), such that the MAI
stockholders receive in the Merger the same percentage of the total
outstanding DHS Common Stock (immediately after giving effect to the
Merger) as they would have received had the Merger been consummated on the
date of this Agreement, and (C) shall be increased or decreased (as the
case may be) in the event and to the extent that the number of outstanding
shares of MAI Common Stock shall, at the Effective Time, be less than or
greater than the number of outstanding shares of MAI Common Stock on the
date hereof, other than increases resulting from exercises of options or
warrants outstanding on the date hereof or hereafter issued in accordance
with Section 5.01(f) and any issuance of MAI Common Stock pursuant to the
outstanding Asset Purchase Agreement between MAI and Jayson Jonsson, such
that the MAI stockholders receive in the Merger the same percentage of the
total outstanding DHS Common Stock (immediately after giving effect to the
Merger) as they would have received had the Merger been consummated on the
date of this Agreement.
(b) From and after the Effective Time, all Shares converted in
accordance with Section 1.02(a)(iii) shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist, and each holder
of a certificate representing any such Shares shall cease to have any rights
with respect thereto, except the right to receive the Merger Consideration.
From and after the Effective Time, all certificates representing the common
stock of Merger Subsidiary shall be deemed for all purposes to represent the
number of shares of Common Stock of the Surviving Corporation into which they
were converted in accordance with Section 1.02(a)(ii).
3
<PAGE>
(c) The DHS Common Stock to be received as consideration
pursuant to the Merger by each holder of Shares (together with any cash which
may be paid in lieu of fractional shares of DHS Common Stock in accordance with
Section 1.06) is referred to herein as the "Merger Consideration."
(d) For purposes of this Agreement, the word "Subsidiary" when
used with respect to any Person means any other Person, whether incorporated or
unincorporated, of which at least a majority of the securities or other
interests having by their terms ordinary voting power to elect at least a
majority of the board of directors or others performing similar functions with
respect to such corporation or other organization is directly or indirectly
owned or controlled by such Person or by any one or more of its Subsidiaries.
For purposes of this Agreement, "Person" means an individual, a corporation, a
limited liability company, a partnership, an association, a trust or any other
entity or organization, including a Governmental Authority.
Section 1.03 Surrender and Payment.
---------------------
(a) Prior to the Effective Time, DHS shall appoint American
Stock Transfer & Trust Company as agent (the "Exchange Agent") for the purpose
of exchanging certificates representing Shares for the Merger Consideration.
Promptly after the Effective Time (but in any event within five (5) business
days thereafter), DHS will send, or will cause the Exchange Agent to send, to
each holder of Shares at the Effective Time (i) a letter of transmittal for use
in such exchange (which shall specify that delivery of the Merger Consideration
shall be effected, and risk of loss and title to the certificates representing
MAI Common Stock shall pass, only upon proper delivery of the certificates
representing Shares to the Exchange Agent), and (ii) instructions for use in
effecting the surrender of the certificates representing Shares in exchange for
the certificates representing DHS Common Stock constituting Merger
Consideration. Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to a holder of certificates theretofore
representing Shares for any amount which may be required to be paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
(b) Each holder of Shares that have been converted into a right
to receive the Merger Consideration, upon surrender to the Exchange Agent of a
certificate or certificates representing such Shares, together with a properly
completed letter of transmittal covering such Shares, will be entitled to
receive the Merger Consideration payable in respect of such Shares and any
dividends payable pursuant to Section 1.03(f). Until so surrendered, each such
certificate shall, after the Effective Time, represent for all purposes only the
right to receive the Merger Consideration and any dividends payable pursuant to
Section 1.03(f).
(c) If any certificate representing Merger Consideration is to
be delivered to a Person other than the registered holder of the Shares
represented by the certificate or certificates surrendered in exchange therefor,
it shall be a condition to the issuance of such certificate evidencing DHS
Common Stock that the certificate or certificates so surrendered shall be
properly endorsed or otherwise be in proper form for transfer and that the
Person requesting such payment shall pay to the Exchange Agent any transfer or
other taxes required by reason of the
4
<PAGE>
issuance of shares of DHS Common Stock to a Person other than the registered
holder of such Shares represented by the certificate or certificates so
surrendered or establish to the satisfaction of the Exchange Agent that such tax
has been paid or is not applicable.
(d) After the Effective Time, there shall be no further
registration of transfers of Shares on the stock transfer book of MAI. If, after
the Effective Time, certificates representing Shares are presented to the
Surviving Corporation, they shall be canceled and exchanged for the
consideration provided for, and in accordance with the procedures set forth, in
this Article I.
(e) Any portion of the Merger Consideration that remains
unclaimed by the holders of Shares one (1) year after the Effective Time shall
be returned to DHS, upon demand, and any such holder who has not exchanged his
Shares for the Merger Consideration in accordance with this Section 1.03 prior
to that time shall thereafter look only to DHS for payment of the Merger
Consideration. Notwithstanding the foregoing, DHS shall not be liable to any
holder of Shares for any amount paid to a public official pursuant to applicable
abandoned property laws. Any amounts remaining unclaimed by holders of Shares
seven (7) years after the Effective Time (or such earlier date immediately prior
to such time as such amounts would otherwise escheat to or become property of
any Governmental Authority) shall, to the extent permitted by applicable law,
become the property of DHS free and clear of any claims or interest of any
Person previously entitled thereto.
(f) No dividends or other distributions with respect to DHS
Common Stock issued in the Merger shall be paid to the holder of any
unsurrendered certificates representing Shares until such certificates are
surrendered as provided in this Section 1.03. Subject to the effect of
applicable laws, following the surrender of such certificates, there shall be
paid, without interest, to the record holder of the DHS Common Stock issued in
exchange therefor at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time payable prior to
or on the date of such surrender with respect to such whole shares of DHS Common
Stock and not previously paid, less the amount of any withholding taxes which
may be required thereon.
(g) In the event that any certificate representing Shares shall
have been lost, stolen or destroyed, upon the making of an affidavit (containing
a standard form of indemnity) of the fact by the person claiming such
certificate to be lost, stolen or destroyed, DHS will, after the Effective Time,
issue in exchange for such lost, stolen or destroyed certificate the certificate
evidencing shares of DHS Common Stock deliverable in respect thereof, as
determined in accordance with this Article I. When authorizing such issue of the
certificate of shares of DHS Common Stock in exchange therefor, DHS may, in its
discretion and as a condition precedent to the issuance thereof, require (unless
such requirement is waived by Gary Hill or Brad Hummel) the owner of such lost,
stolen or destroyed certificate (unless such owner is an institutional investor)
to give DHS a bond in such sum as it may direct as indemnity against any claim
that may be made against DHS with respect to the certificate alleged to have
been lost, stolen or destroyed.
5
<PAGE>
(h) Approval and adoption of this Agreement by the stockholders
of MAI shall constitute, as an integral part of the Merger, ratification of the
appointment of, and the reappointment of, said Exchange Agent.
Section 1.04 Stock Option Plans.
------------------
(a) At the Effective Time, the terms of each outstanding option
granted by MAI to purchase shares of MAI Common Stock (a "MAI Stock Option")
under the 1994 Amended and Restated Long Term Incentive Plan of MAI (the "MAI
Option Plan"), whether vested or unvested, shall be adjusted as necessary to
provide that at the Effective Time, each MAI Stock Option outstanding
immediately prior to the Effective Time shall be fully vested pursuant to the
terms of the MAI Option Plan and shall be deemed to constitute and shall become
an option to acquire, on the same terms and conditions as were applicable under
such MAI Stock Option, the same number of shares of DHS Common Stock as the
holder of such MAI Stock Option would have been entitled to receive pursuant to
the Merger (including, if applicable, after giving effect to the adjustments
contemplated by the proviso to Section 1.02(a)(iii)) had such holder exercised
-------
such MAI Stock Option in full immediately prior to the Effective Time, at a
price per share of DHS Common Stock equal to (i) the aggregate exercise price
for the shares of MAI Common Stock otherwise purchasable pursuant to such MAI
Stock Option, divided by (ii) the aggregate number of shares of DHS Common Stock
deemed purchasable pursuant to such MAI Stock Option (each, as so adjusted, an
"Adjusted Option"); provided that, after aggregating all the Shares of a holder
--------
subject to MAI Stock Options, any fractional share of DHS Common Stock resulting
from such calculation for such holder shall be rounded up to the nearest whole
share and provided, further, that in the case of any option to which Section 421
of the Code applies by reason of its qualification under any of Sections 422
through 424 of the Code ("qualified stock options"), the option price, the
number of shares purchasable pursuant to such option, and the terms and
conditions of exercise of such option shall be determined in order to comply
with Section 424 of the Code.
(b) As soon as practicable after the Effective Time, DHS shall
deliver to the holders of MAI Stock Options appropriate notices setting forth
such holders' rights pursuant to the MAI Option Plan and the agreements
evidencing the grants of such MAI Stock Options and that such MAI Stock Options
and agreements shall be assumed by DHS and shall continue in effect on the same
terms and conditions (subject to the adjustments required by this Section 1.04
after giving effect to the Merger).
(c) DHS shall take such actions as are reasonably necessary for
the assumption of the MAI Option Plan pursuant to this Section 1.04, including
the reservation, issuance and listing of DHS Common Stock as is necessary to
effectuate the transactions contemplated by this Section 1.04. DHS shall prepare
and file with the SEC a registration statement on Form S-8 or other appropriate
form with respect to shares of DHS Common Stock subject to MAI Stock Options
issued under the MAI Option Plan (as well as shares of DHS Common Stock which
become subject to the MAI Warrants as provided in Section 1.05) and shall use
its reasonable efforts to have such registration statement declared effective as
soon as practicable following the Effective Time and to maintain the
effectiveness of such registration
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statement or registration statements covering such MAI Stock Options (and
maintain the current status of the prospectus or prospectuses contained therein)
for so long as such MAI Stock Options remain outstanding.
Section 1.05 MAI Warrants. At the Effective Time, by virtue of the
------------
Merger and without requirement of any action on the part of the holder(s)
thereof (but subject to the consent of such holder(s) with respect to the
adjustments hereunder), the outstanding common stock purchase warrants of MAI
(the "MAI Warrants") immediately prior to the Effective Time shall automatically
be converted into and shall become warrants of DHS to acquire, on the same terms
and conditions as were applicable under such MAI Warrant, the same number of
shares of DHS Common Stock as the holder of such MAI Warrant would have been
entitled to receive pursuant to the Merger (including, if applicable, after
giving effect to the adjustments contemplated by the proviso to Section
-------
1.02(a)(iii)) had such holder exercised such MAI Warrant in full immediately
prior to the Effective Time, at a price per share of DHS Common Stock equal to
(a) the aggregate exercise price for the shares of MAI Common Stock otherwise
purchasable pursuant to such MAI Warrant, divided by (b) the aggregate number of
shares of DHS Common Stock deemed purchasable pursuant to such MAI Warrant
(each, as so adjusted, an "Adjusted Warrant"); provided that, after aggregating
-------- ----
all of the Shares of a holder subject to MAI Warrants, any fractional share of
DHS Common Stock resulting from such calculation for such holder shall be
rounded up to the nearest whole share.
Section 1.06 Fractional Shares. Neither certificates nor scrip for
-----------------
fractional shares of DHS Common Stock will be issued in the Merger, but in lieu
thereof each holder of MAI Common Stock otherwise entitled to a fraction of a
share of DHS Common Stock (after aggregating all fractional shares of MAI Common
Stock that would otherwise be received by such holder) will be entitled
hereunder to (a) if permitted by the senior and subordinated lenders to DHS, a
cash payment calculated as hereinafter provided, or (b) if such cash payment is
not permitted by DHS' lenders, an additional fractional share in an amount
sufficient to round such stockholder's aggregate holdings of DHS Common Stock to
the next nearest whole share. The amount of any such cash payment shall equal,
in the case of each fractional share, an amount (rounded to the nearest whole
cent), without interest, calculated as the product of (i) such fraction,
multiplied by (ii) the arithmetic mean of the closing sales prices for the DHS
Common Stock reported on the NASDAQ National Market System for each of the five
(5) consecutive trading days on which DHS Common Stock was traded immediately
preceding the Effective Time as quoted in the Wall Street Journal, or other
reliable financial newspaper or publication. For the purposes of the preceding
sentence, a "trading day" means a day on which trading generally takes place on
the NASDAQ National Market System. No such fractional share interest shall
entitle the owner thereof to vote or to any rights of a stockholder of DHS.
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ARTICLE II
THE SURVIVING CORPORATION
Section 2.01 Articles of Incorporation. Subject to the provisions of
-------------------------
Section 5.17, the articles of incorporation of Merger Subsidiary shall be the
articles of incorporation of the Surviving Corporation, except that, at the
Effective Time, the name of the Surviving Corporation shall be changed to "MAI,
Inc." or such other name as DHS may designate on or before the Effective Time,
until thereafter amended in accordance with applicable law and such articles of
incorporation.
Section 2.02 By-Laws. Subject to the provisions of Section 5.17, the
-------
by-laws of Merger Subsidiary in effect at the Effective Time shall be the by-
laws of the Surviving Corporation, until thereafter amended in accordance with
applicable law, the articles of incorporation of the Surviving Corporation and
such by-laws.
Section 2.03 Directors and Officers. From and after the Effective Time,
----------------------
until successors are duly elected or appointed and qualified in accordance with
the Texas Law and the articles of incorporation and by-laws of the Surviving
Corporation, the directors and the officers of the Surviving Corporation shall
be those persons set forth on Schedule 2.03 to the disclosure letter delivered
by DHS to MAI concurrently with the execution and delivery of this Agreement
(the "DHS Disclosure Letter").
ARTICLE III
REPRESENTATIONS AND WARRANTEES OF MAI
MAI represents and warrants to DHS that:
Section 3.01 Organization and Power. Each of MAI and its Subsidiaries
----------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation, and has the requisite corporate
power and authority and governmental approvals to own, lease and operate its
properties and to carry on its business as now being conducted. Each of MAI and
its Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the property owned, leased or operated by
it or the nature of the business conducted by it makes such qualification or
licensing necessary, except where the failure to be so duly qualified or
licensed and in good standing would not, individually or in the aggregate, have
a Material Adverse Effect on MAI. For purposes of this Agreement, a "Material
Adverse Effect" with respect to any Person means a material adverse effect (a)
on the condition (financial or otherwise), business, liabilities, properties,
assets, results of operations or prospects of such Person and its Subsidiaries,
taken as a whole, or (b) on the ability of such Person to perform its
obligations under or to consummate the transactions contemplated by this
Agreement. Schedule 3.01 to the disclosure letter delivered by MAI to DHS
concurrently with the execution and delivery of this Agreement (the "MAI
Disclosure Letter") sets forth (i) the name and jurisdiction of incorporation of
each Subsidiary of MAI, (ii) its authorized capital stock, (iii) the number of
issued and outstanding shares of its capital stock, and (iv) the record and
beneficial owners of such shares. Except as set forth on Schedule 3.01 to the
MAI Disclosure Letter, MAI does not directly or indirectly own any equity
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or similar interest in, or any interest convertible into or exchangeable or
exercisable for, any equity or similar interest in, any Person. MAI has
heretofore delivered to DHS true and complete copies of the certificate or
articles of incorporation and by-laws as currently in effect of MAI and its
Subsidiaries.
Section 3.02 Corporate Authorization. The execution, delivery and
-----------------------
performance by MAI of this Agreement and the consummation by MAI of the
transactions contemplated hereby are within MAI's corporate powers and, except
as set forth in the second succeeding sentence of this Section 3.02, have been
duly authorized by all necessary corporate action, including, without
limitation, authorization and approval of its Board of Directors. As of the date
of this Agreement, the Board of Directors of MAI has recommended approval and
adoption of this Agreement by the shareholders of MAI and directed that this
Agreement be submitted to the stockholders of MAI for their approval. The
affirmative vote of the holders of at least two-thirds of the outstanding Shares
is the only vote of any class or series of MAI's capital stock necessary to
approve and adopt this Agreement, the Merger and the transactions contemplated
by this Agreement. This Agreement has been duly executed and delivered by MAI
and, subject to the receipt of the approval described in the immediately
preceding sentence, constitutes a legal, valid and binding agreement of MAI,
enforceable against MAI in accordance with its terms (subject to applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and
other similar laws affecting creditors' rights generally from time to time in
effect and to general principles of equity, regardless of whether in a
proceeding in equity or at law).
Section 3.03 Governmental Authorization. The execution, delivery and
--------------------------
performance by MAI of this Agreement, and the consummation by MAI of the
transactions contemplated hereby, require no action by or in respect of, or
filing with or notice to, any United States federal, state or local government,
any foreign country, any foreign state or local government or any court,
administrative agency or commission or other governmental or regulatory agency
or authority of any of the foregoing (collectively "Governmental Authorities"
and individually a "Governmental Authority"), other than (a) the filing of
articles of merger with respect to the Merger with the Texas Secretary of State
and appropriate documents with the relevant authorities of other states in which
MAI is qualified to do business; (b) compliance with any applicable requirements
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), provided that nothing contained in this Agreement shall be deemed to
constitute an acknowledgement that any requirements under the HSR Act are
applicable to the transactions contemplated by this Agreement; (c) compliance
with any applicable requirements of the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder (the "1933 Act"); (d)
compliance with any applicable requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"1934 Act"); and (e) compliance with any other applicable securities laws.
Section 3.04 Non-Contravention. Except as set forth on Schedule 3.04
-----------------
to the MAI Disclosure Letter, the execution, delivery and performance by MAI of
this Agreement do not, and the consummation by MAI of the transactions
contemplated hereby will not, require the consent of any other Person, or
conflict with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, result in or give to any
Person any right
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of payment or reimbursement, termination, cancellation, modification or
acceleration of, or result in the creation or imposition of any Lien on any of
the assets or properties of MAI or any of its Subsidiaries under, any of the
terms, conditions or provisions of (a) the certificate or articles of
incorporation, by-laws or similar organizational documents of MAI or any of its
Subsidiaries, (b) assuming receipt of the approval of stockholders referred to
in Section 3.02, and compliance with the matters referred to in Section 3.03,
any United States or foreign statute, law, regulation, rule or ordinance
(together "Laws") or any judgment, injunction, order, writ, license, permit or
decree of any Governmental Authority (together "Orders") binding upon or
applicable to MAI, any Subsidiary of MAI or any of their respective assets or
properties, or (c) any note, bond, mortgage, security agreement, indenture,
lease, contract, instrument or other agreement of any kind to which MAI or any
Subsidiary of MAI is a party or by which MAI or any Subsidiary of MAI or any of
their respective assets or properties is bound (a "MAI Agreement") or any
license, franchise, permit or other similar authorization held by MAI or any
Subsidiary of MAI. For purposes of this Agreement, "Lien" means, with respect to
any asset, any mortgage, lien, pledge, charge, security interest or encumbrance
of any kind in respect of such asset, and, in addition, with respect to real
property, any easement, right of way or other restriction, limitation or burden
of any kind in respect of such real property.
Section 3.05 Capitalization of MAI.
---------------------
(a) The authorized capital stock of MAI consists solely of
30,000,000 shares of MAI Common Stock and 5,000,000 shares of preferred stock,
par value $.002 per share (the "MAI Preferred Stock"). As of the close of
business on December 31, 1998, (i) 6,117,079 shares of MAI Common Stock were
issued and outstanding, 277,203 shares of MAI Common Stock were issued and held
in the treasury of MAI, and 1,107,607 shares of MAI Common Stock were reserved
for issuance under the MAI Option Plan and the MAI Warrants, (ii) options to
purchase 917,541 shares of MAI Common Stock were outstanding under the MAI
Option Plan and warrants to purchase 15,610 shares of MAI Common Stock were
outstanding under the MAI Warrants, and (iii) no shares of MAI Preferred Stock
are issued, outstanding or held in the treasury of MAI. All of the outstanding
shares of MAI Common Stock are, and all shares reserved for issuance will be,
when issued in accordance with the terms specified in the instruments or
agreements pursuant to which they are issuable, duly authorized, validly issued,
fully paid and non-assessable. Except (A) as set forth in this Section 3.05 or
in Schedule 3.05 to the MAI Disclosure Letter, and (B) for Shares that may be
issued as provided in Section 5.01(f), there are outstanding (w) no shares of
capital stock or other voting securities of MAI, (x) no securities of MAI
convertible into or exchangeable for shares of capital stock or voting
securities of MAI, (y) no options, warrants or other rights to acquire from MAI,
and no preemptive or similar rights, subscriptions or other rights, convertible
securities, agreements, arrangements or commitments of any character, obligating
MAI to issue, transfer or sell, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of MAI or obligating MAI to grant, extend or enter into any such
option, warrant, subscription or other right, convertible security, agreement,
arrangement or commitment, and (z) no restricted stock awards, stock
appreciation rights, performance share agreements or stock unit awards of MAI
(the items in clauses (w), (x), (y) and (z) being referred to collectively as
the "MAI Securities").
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(b) Except as set forth on Schedule 3.05 to the MAI Disclosure
Letter, (i) there are no voting trusts or other agreements or understandings to
which MAI or any Subsidiary of MAI is a party with respect to the voting of the
capital stock of MAI or any Subsidiary of MAI, (ii) no Person has or is entitled
to any registration rights in respect of any MAI Securities, and (iii) none of
MAI or its Subsidiaries has any contractual obligation to redeem, repurchase or
otherwise acquire any MAI Securities or any capital stock of any Subsidiary of
MAI, including as a result of the transactions contemplated by this Agreement,
or to provide funds to, or make any investment in, any Subsidiary of MAI or any
other Person. Except as permitted by this Agreement, following the Merger,
neither MAI nor any of its Subsidiaries will have any obligation to issue,
transfer or sell any shares of its capital stock pursuant to any employee
benefit plan or otherwise.
Section 3.06 Capitalization of Subsidiaries.
------------------------------
Except as set forth on Schedule 3.06 to the MAI Disclosure Letter, all of the
outstanding shares of capital stock of, or other ownership interests in, each
Subsidiary of MAI, are duly authorized, validly issued, fully paid and non-
assessable and are owned, beneficially and of record, by MAI, directly or
indirectly, free and clear of any consensual Lien (including any restriction on
the right to vote, sell or otherwise dispose of such capital stock or other
ownership interests). There are no (a) outstanding securities of MAI or any
Subsidiary of MAI convertible into or exchangeable for shares of capital stock
or other voting securities or ownership interests in any Subsidiary of MAI, or
(b) options, warrants or other rights to acquire from MAI or any Subsidiary of
MAI, and no other obligation of MAI or any Subsidiary of MAI to issue, any
capital stock, voting securities or other ownership interests in, or any
securities convertible into or exchangeable for, any capital stock, voting
securities or ownership interests in, any Subsidiary of MAI (the items in
clauses (a) and (b) being referred to collectively as the "MAI Subsidiary
Securities").
Section 3.07 SEC Filings.
-----------
(a) MAI has filed all reports, schedules, forms, statements and
other documents with the Securities and Exchange Commission (the "SEC') required
to be filed by MAI since October 11, 1996 (the "MAI SEC Documents").
(b) As of its filing date, each MAI SEC Document filed pursuant
to the 1934 Act complied as to form in all material respects with the
requirements of the 1934 Act and did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(c) Each MAI SEC Document that is a registration statement, as
amended or supplemented, if applicable, filed pursuant to the 1933 Act as of the
date such registration statement or amendment became effective complied as to
form in all material respects with the requirements of the 1933 Act and did not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 3.08 Financial Statements.
--------------------
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(a) The audited consolidated financial statements included in MAI's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "MAI
10-K") and the unaudited consolidated interim financial statements of MAI
included in the MAI SEC Documents filed after such date (collectively, the "MAI
Financial Statements") complied, or will comply, as to form in all material
respects with the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with generally accepted accounting
principles ("GAAP") applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly present the
consolidated financial position of MAI and its consolidated Subsidiaries as of
the dates thereof and their consolidated results of operations and cash flows
for the periods then ended (subject to footnote disclosures and normal year-end
adjustments in the case of any unaudited interim financial statements). The MAI
Financial Statements have been prepared from and are consistent with the books
and records of MAI, which reflect all material transactions of MAI and its
Subsidiaries. For purposes of this Agreement, "MAI Balance Sheet" means the
consolidated balance sheet of MAI as of December 31, 1997 set forth in the MAI
10-K and "MAI Balance Sheet Date" means December 31, 1997. Each Subsidiary of
MAI is treated as a consolidated subsidiary of MAI in the MAI Financial
Statements for all periods covered thereby.
(b) Without limitation of Section 3.08(a), (i) MAI or its
Subsidiaries has good and marketable title to all of the assets reflected in the
balance sheet of MAI included in it quarterly report on form 10-Q for the
quarter ended September 30, 1998 (the "Most Recent MAI Balance Sheet") free and
clear of all liens, security interests, encumbrances or other adverse claims
other than liens of secured lenders disclosed in the footnotes to the Most
Recent MAI Balance Sheet and interests of lessors in respect of capitalized
leases, (ii) the reserve for doubtful accounts reflected in the Most Recent MAI
Balance Sheet is adequate and in accordance with GAAP, (iii) the inventories
reflected in the Most Recent MAI Balance Sheet have been valued at the lower of
cost or market, and are not materially in excess of the normal requirement of
MAI's business, and (iv) all equipment and other fixed assets reflected in the
Most Recent MAI Balance Sheet are in good operating condition (reasonable wear
and tear excepted); all of the representations in this Section 3.08(b) being
subject to the collection of accounts receivable, sale and use of inventory, and
disposition of obsolete equipment, in the ordinary course of business.
Section 3.09 Information Supplied. None of the information supplied or
--------------------
to be supplied by MAI for inclusion or incorporation by reference in and none of
the statements based on such information contained in (a) the joint proxy
statement to be filed with the SEC relating to the stockholders' meetings of MAI
and DHS to be held in connection with the Merger, as amended or supplemented
from time to time (as so amended or supplemented, the "Proxy Statement"), will,
at the date the Proxy Statement is first mailed to stockholders and at the time
of the meetings of such stockholders in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, or (b) the registration statement on Form
S-4 of DHS to be filed under the 1933 Act relating to the issuance of DHS Common
Stock in the Merger, as amended or supplemented from time to time (as so amended
or supplemented, the "Form S-4"), will, at the time the Form S-4 becomes
effective under the 1933 Act and at the Effective Time, contain any untrue
statement of a material fact or omit to state any
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material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 3.10 Absence of Certain Changes. Except as disclosed in the MAI
--------------------------
SEC Documents filed prior to the date of this Agreement or as disclosed on
Schedule 3.10 to the MAI Disclosure Letter, since September 30, 1998, MAI and
its Subsidiaries have conducted their respective businesses in the ordinary
course consistent with past practice and there has not been:
(a) Any material transaction of MAI or any of its Subsidiaries
outside of the normal course of business, any damage or destruction (whether or
not covered by insurance) of any material assets of MAI or any of its
Subsidiaries, or any event, occurrence or development which, individually or in
the aggregate, has had or would be reasonably likely to have a Material Adverse
Effect on MAI;
(b) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of MAI, any
issuance of MAI Common Stock other than upon exercise of MAI Warrants or MAI
Options outstanding on December 31, 1997, or any repurchase, redemption or other
acquisition by MAI or any Subsidiary of MAI of any amount of outstanding shares
of capital stock or other equity securities of, or other ownership interests in,
MAI or any Subsidiary of MAI;
(c) any amendment of any term of any MAI Securities or MAI
Subsidiary Securities;
(d) (i) any incurrence or assumption by MAI or any Subsidiary of MAI
of any indebtedness for borrowed money other than under existing credit
facilities in the ordinary course of business consistent with past practices, or
(ii) any guarantee, endorsement or other incurrence or assumption of liability
(whether directly, contingently or otherwise) by MAI or any Subsidiary of MAI
for the obligations of any other Person (other than any wholly-owned Subsidiary
of MAI);
(e) any creation or assumption by MAI or any Subsidiary of MAI of
any consensual Lien on any material asset of MAI or any Subsidiary of MAI;
(f) any making of any loan, advance or capital contribution to or
investment in any Person by MAI or any Subsidiary of MAI other than (i) loans,
advances or capital contributions to or investments in wholly-owned Subsidiaries
of MAI, or (ii) loans or advances to employees of MAI or any Subsidiary of MAI
made in the ordinary course of business consistent with past practice;
(g) (i) any contract or agreement entered into by MAI or any
Subsidiary of MAI on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business, or (ii) any modification,
amendment, assignment, termination or relinquishment by MAI or any Subsidiary of
MAI of any contract, license, or other right (including any insurance policy
naming it as a beneficiary or a loss payable payee) that would be reasonably
likely to have a Material Adverse Effect on MAI, other than those contemplated
by this Agreement;
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(h) any change in any method of accounting or accounting principles
or practices by MAI or any Subsidiary of MAI, except for any such change
required by reason of a change in GAAP; or
(i) any (i) grant of any severance or termination pay to any
director, officer or employee of MAI or any of its Subsidiaries, (ii) entering
into of any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer or employee
of MAI or any of its Subsidiaries, (iii) increase in benefits payable under any
existing severance or termination pay policies or employment agreements, or (iv)
increase in rates of compensation or bonus in excess of five (5%) percent or
increase in other benefits payable to officers or employees of MAI or any of its
Subsidiaries or increase in compensation, bonus or other benefits payable to
directors of MAI or any of its Subsidiaries.
Section 3.11 No Undisclosed Liabilities. Neither MAI nor any Subsidiary
--------------------------
of MAI has any material liabilities or obligations (whether pursuant to
contracts or otherwise) of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, except:
(a) those liabilities and obligations set forth on the MAI Balance
Sheet and not heretofore paid or discharged;
(b) those liabilities and obligations incurred since September 30,
1998 in the ordinary course of business consistent with past practice; and
(c) those liabilities or obligations under this Agreement or
incurred in connection with the transactions contemplated hereby.
Section 3.12 Litigation. Except as disclosed on Schedule 3.12 to the
----------
MAI Disclosure Letter, (a) there are no actions, suits, arbitrations or
proceedings pending or, to the knowledge of MAI, threatened against, relating to
or affecting, nor are there are any Governmental Authority investigations or
audits pending or, to the knowledge of MAI, threatened against, relating to or
affecting, MAI or any of its Subsidiaries or any of their respective assets or
properties nor, to the knowledge of MAI, is there any valid basis for any such
action, suit, arbitration, proceeding, investigation or audit which, if
adversely determined, would have a Material Adverse Effect on MAI, and (b)
neither MAI nor any of its Subsidiaries is subject to any order of any
Governmental Authority which adversely affects the ability of MAI to consummate
the transactions contemplated by this Agreement.
Section 3.13 Taxes.
-----
(a) All Tax Returns required to be filed by MAI, any of its
Subsidiaries, or any corporation that was included in the filing of a return
with MAI or its Subsidiaries on a consolidated, combined or unitary basis have
been filed (the "MAI Tax Returns") and all Taxes required to be shown on the MAI
Tax Returns, or a subsequent assessment with respect thereto, or otherwise due
or payable (to the extent in excess of $50,000 in the
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aggregate) have been paid and any penalties and interest relating to such Taxes
(to the extent in excess of $50,000 in the aggregate) have been paid. No other
Taxes (to the extent in excess of $50,000 in the aggregate) are payable by the
MAI Group with respect to items or periods covered by such Tax Returns or with
respect to Tax periods prior to the date of this Agreement. None of the MAI Tax
Returns contain, or are required to contain, a disclosure statement under
Section 6662 of the Code, or any similar provision of state, local or foreign
law, with respect to any items that relate to MAI or its Subsidiaries in order
to avoid a penalty for any taxable year. All MAI Tax Returns are true, correct
and complete in all material respects. MAI has made available to DHS correct and
complete copies of all MAI Tax Returns for all periods which are not closed by
the statute of limitations.
(b) No adjustment relating to any MAI Tax Return has been proposed
formally or, to MAI's knowledge, informally by any Governmental Authority (to
the extent in excess of $50,000 in the aggregate), and no basis exists for any
such adjustment that would have a Material Adverse Effect on MAI. There are no
outstanding subpoenas or requests for information with respect to any MAI Tax
Returns or portions thereof. There are no pending or, to MAI's knowledge,
threatened actions or proceedings for the assessment or collection of Taxes for
which MAI or its Subsidiaries may be liable (to the extent in excess of $50,000
in the aggregate). There are no Tax liens on any assets of MAI or its
Subsidiaries, except with respect to Taxes which are not yet due and payable.
(c) No consent under Section 341(f) of the Code has been filed with
respect to MAI or any of its Subsidiaries. Neither MAI nor any of its
Subsidiaries is or has been subject to the dual consolidated loss provisions of
Section 1503 of the Code.
(d) MAI and its Subsidiaries are members of an affiliated group
(within the meaning of Section 1504 of the Code) that is eligible to file a
consolidated return. No other entity is or has been eligible to file a
consolidated or combined return with MAI and its Subsidiaries, and neither MAI
nor its Subsidiaries have filed or consented to the filing of any Federal or
state consolidated or combined return with any entity not a member of the MAI
Group. Neither MAI nor any of its Subsidiaries has been at any time a member of
any partnership or joint venture or the holder of a beneficial interest in any
trust for any Person for which the statute of limitations for any Tax
potentially applicable as a result of such membership or holding has not
expired.
(e) MAI and its Subsidiaries have properly accrued all current or
contested Taxes (to the extent in excess of $50,000 in the aggregate) on their
books and records, and their books and records reflect reserves that are
adequate for the payment of all Taxes (to the extent in excess of $50,000 in the
aggregate) not yet due and payable that are properly accruable thereon through
the date of this Agreement (including Taxes being contested). Neither MAI nor
any of its Subsidiaries have any liability for any Taxes which, in the
aggregate, are more than $50,000 in excess of amounts accrued or the reserves
established. All Taxes (to the extent in excess of $50,000 in the aggregate)
required to be withheld, collected or deposited in connection with the
operations and activities of MAI or its Subsidiaries have been timely withheld,
collected or deposited and, to the extent required, have been paid to the
relevant taxing authority.
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(f) MAI does not own nor has it owned during the past five (5) years
any capital stock of DHS. At the Effective Time, the fair market value of the
assets of MAI will exceed the sum of its liabilities, plus the amount of other
liabilities, if any, to which the assets are subject.
(g) There are no requests for rulings, determinations or information
currently outstanding with any Taxing Authority that could reasonably be
expected to affect the Taxes of MAI or any of its Subsidiaries.
(h) The MAI Tax Returns have been audited by the Internal Revenue
Service ("Service") or other governmental agency (or closed by applicable
statutes of limitations) and all Tax liabilities in respect thereof have been
finally determined for all taxable years ending on or before December 31, 1996.
There are no outstanding waivers or agreements extending the statute of
limitations for any period with respect to any Tax to which MAI or any of its
Subsidiaries may be liable.
(i) "Taxes" shall mean any and all taxes, charges, fees, levies or
other assessments, including income, gross receipts, excise, real or personal
property, sales, withholding, social security, retirement, unemployment,
occupation, use, goods and services, service use, license, value added, capital,
net worth, payroll, profits, withholding, franchise, transfer and recording
taxes, fees and charges, and any other taxes, assessment or similar charges
imposed by the Service or any taxing authority (whether domestic or foreign
including any state, county, local or foreign government or any subdivision or
taxing agency thereof (including a United States possession)) (a "Taxing
Authority"), whether computed on a separate, consolidated, unitary, combined or
any other basis, and such term shall include any interest whether paid or
received, fines, penalties or additional amounts attributable to, or imposed
upon, or with respect to, any such taxes, charges, fees, levies or other
assessments. "Tax Return" shall mean any report, return, document, declaration
or other information or filing required to be supplied to any taxing authority
or jurisdiction (foreign or domestic) with respect to Taxes, including
information returns, any documents with respect to or accompanying payments of
estimated Taxes, or with respect to or accompanying requests for the extension
of time in which to file any such report, return, document, declaration or other
information. The term "MAI Group" shall mean, individually and collectively,
(i) MAI, (ii) its Subsidiaries, and (iii) any trust, corporation, partnership or
any other entity as to which MAI or its Subsidiaries is liable for Taxes
incurred by such entity either as a transferee, or pursuant to Treasury
Regulations Section 1.1502-6, or pursuant to any other provision of federal,
state, local or foreign law or regulations.
(j) MAI has made available to DHS a true and complete copy of any
(i) elections, letter rulings and determination letters relating to Taxes with
respect to MAI or its Subsidiaries which were in effect or affected Taxes for
any periods which are not closed by the statute of limitations, and (ii)
examination reports, closing agreements and statements of deficiencies for Taxes
assessed against or agreed to by MAI or any of its Subsidiaries which were in
effect or affected Taxes for any periods which are not closed by the statute of
limitations.
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Section 3.14 Employee Benefit Plans; ERISA.
-----------------------------
(a) Except as set forth on Schedule 3.14 to the MAI Disclosure
Letter, there are no employee benefit plans (including any plans for the benefit
of directors or former directors), contracts or agreements (including employment
agreements and severance agreements, incentive compensation, bonus, stock
option, stock appreciation rights and stock purchase plans) of any type
(including plans described in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")), maintained by MAI, any of its
Subsidiaries or any trade or business, whether or not incorporated (a "MAI ERISA
Affiliate"), that together with MAI would be deemed a "controlled group" within
the meaning of Section 4001(a)(14) of ERISA, or with respect to which MAI, any
of its Subsidiaries, or any MAI ERISA Affiliate, has or may have a liability
(the "MAI Benefit Plans"). Except as disclosed on Schedule 3.14 to the MAI
Disclosure Letter (or as otherwise permitted by this Agreement), (i) neither MAI
nor any ERISA Affiliate has any plan or commitment, whether legally binding or
not, to create any additional MAI Benefit Plan or modify or change any existing
MAI Benefit Plan that would affect any employee or terminated employee of MAI or
any ERISA Affiliate, and (ii) since December 31, 1997, there has been no change,
amendment, modification to, or adoption of, any MAI Benefit Plan.
(b) With respect to each MAI Benefit Plan: (i) if intended to
qualify under Section 401(a), 401(k) or 403(a) of the Code, such plan so
qualifies, and its trust is exempt from taxation under Section 501(a) of the
Code; (ii) no failures to administer such plan in accordance with its terms and
applicable law have occurred that have had or would reasonably be expected to
have a Material Adverse Effect on MAI; (iii) no breaches of fiduciary duty have
occurred; (iv) no prohibited transaction within the meaning of Section 406 of
ERISA has occurred; (v) as of the date of this Agreement, no lien imposed under
the Code or ERISA exists; and (vi) all contributions and premiums due (including
any extensions for such contributions and premiums) have been made in full or
adequate provision has been made therefor in the MAI Financial Statements.
(c) None of the MAI Benefit Plans has incurred any "accumulated
funding deficiency," as such term is defined in Section 412 of the Code, whether
or not waived.
(d) Neither MAI nor any MAI ERISA Affiliate has incurred any
liability under Title IV of ERISA (including Sections 4063-4064 and 4069 of
ERISA) since the effective date of ERISA that has not been satisfied in full.
(e) With respect to each MAI Benefit Plan that is a "welfare plan"
(as defined in Section 3(l) of ERISA), no such plan provides medical or death
benefits with respect to current or former employees of MAI or any of its
Subsidiaries beyond their termination of employment, other than as required by
law or on an employee-pay-all basis.
(f) Except as set forth on Schedule 3.14 to the MAI Disclosure
Letter, the consummation of the Merger pursuant to this Agreement will not (i)
entitle any individual to severance pay or any tax "gross-up" payments with
respect to the imposition of any tax pursuant to Section 4999 of the Code or
accelerate the time of payment or vesting, or increase the amount,
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of compensation or benefits due to any individual with respect to any MAI
Benefit Plan, or (ii) constitute or result in a prohibited transaction under
Section 4975 of the Code or Section 406 or 407 of ERISA with respect to any MAI
Benefit Plan.
(g) There is no MAI Benefit Plan that is a "multiemployer plan," as
such term is defined in Section 3(37) of ERISA, or which is covered by Section
4063 or 4064 of ERISA.
Section 3.15 Certain Agreements; Compliance with Agreements.
----------------------------------------------
(a) Except as disclosed on Schedule 3.15 to the MAI Disclosure
Letter or as provided for in this Agreement, neither MAI nor any of its
Subsidiaries is a party to or bound by any oral or written:
(i) consulting agreement not terminable on thirty (30) days' or
less notice;
(ii) agreement with any officer or other key employee the benefits
of which are contingent, or the terms of which are materially altered, upon
the occurrence of the transactions contemplated by this Agreement;
(iii) agreement with respect to any officer providing any term of
employment or compensation guarantee;
(iv) agreement or plan, including any stock option plan, stock
appreciation rights plan, employee stock ownership plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis
of any of the transactions contemplated by this Agreement;
(v) agreement containing covenants that limit the ability of MAI or
any of its Subsidiaries to compete in any line of business or with any
Person, or that involve any restriction on the geographic area in which, or
method by which, MAI or any of its Subsidiaries may carry on its business
(other than as may be required by law or any regulatory agency);
(vi) agreement, contract or understanding, other than this Agreement
and the articles of incorporation and by-laws of MAI, regarding the capital
stock of MAI or committing to dispose of some or all of the capital stock
or all or substantially all of the assets of MAI;
(vii) partnership, joint venture or profit sharing agreement of MAI
or any of its Subsidiaries with any Person;
(viii) agreement, contract, commitment, indenture or other instrument
of MAI or any of its Subsidiaries relating to the borrowing of money, or
the direct or indirect guarantee of any obligation for, or an agreement to
service the repayment of, borrowed
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money, or any other contingent obligation in respect to indebtedness of any
other Person, including without limitation any agreement or arrangement
relating to the maintenance of compensating balances, any agreement or
arrangement with respect to lines of credit, any agreement or arrangement
to purchase or repurchase obligations of any other Person, any agreement or
arrangement to advance or supply funds to or to invest in any other Person,
any agreement or arrangement to pay for property, products or services of
any other Person even if such property, products or services are not
conveyed, delivered or rendered, or any guarantee with respect to any lease
or other similar periodic payment to be made by any other Person;
(ix) lease of MAI or any of its Subsidiaries with annual rental
payments aggregating $50,000 or more;
(x) agreement, contract or commitment of MAI or any of its
Subsidiaries relating to the disposition or acquisition of any investment
in any Person if such investment has a book value of, or the disposition or
acquisition price of such investment or interest is, $50,000 or more;
(xi) agreement, contract or commitment which involves payment or
potential payment, pursuant to the terms of such agreement, contract or
commitment, by or to MAI or any of its Subsidiaries of $50,000 or more
within any twelve (12) month period commencing after the date hereof;
(xii) severance or similar agreement with any employee which has been
entered into or modified at any time since June 30, 1998; or
(xiii) agreement, contract, commitment or arrangement between MAI or
any of its Subsidiaries and any Affiliate of MAI or any of its Subsidiaries
that is not described in or filed as an exhibit to a MAI SEC Document.
(b) Neither MAI nor any of its Subsidiaries nor, to the knowledge
of MAI, any other party thereto is in breach or violation of or in default in
the performance or observance of any term or provision of, and no event has
occurred which, with notice or lapse of time or both, is reasonably expected to
result in a default under, (i) the certificates or articles of incorporation,
by-laws or similar organizational documents of MAI or any of its Subsidiaries,
or (ii) any contract, agreement, plan or instrument listed or required to be
listed on Schedule 3.15 to the MAI Disclosure Letter, except in the case of
clause (ii) for breaches, violations or defaults which, individually or in the
aggregate, are not having and are not reasonably expected to have a Material
Adverse Effect on MAI. Except as set forth on Schedule 3.04 to the MAI
Disclosure Letter, no party to any such contract, agreement, plan or instrument
will have the right to terminate any or all of the provisions of any such
contract, agreement, plan or instrument as a result of the transactions
contemplated by this Agreement.
(c) No outstanding purchase commitments of MAI or any of its
Subsidiaries is materially in excess of the reasonable requirements of their
respective business.
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(d) Neither MAI or any of its Subsidiaries has received written
notice of any existing, announced or anticipated changes in the policies of any
material clients, customers, referral sources or suppliers which could
reasonably be expected to have a Material Adverse Effect on MAI.
Section 3.16 Compliance with Laws and-Orders.
-------------------------------
(a) MAI and its Subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals of all Governmental Authorities necessary for
the lawful conduct of their respective businesses (the "MAI Permits"), except
for failures to hold such permits, licenses, variances, exemptions, orders and
approvals which, individually or in the aggregate, are not having and are not
reasonably expected to have a Material Adverse Effect on MAI. MAI and its
Subsidiaries are in compliance with. the terms of the MAI Permits, except
failures so to comply which, individually or in the aggregate, are not having
and are not reasonably expected to have a Material Adverse Effect on MAI. MAI
and its Subsidiaries are not in violation of or default under any Laws or
Orders, except for such violations or defaults which, individually or in the
aggregate, are not having and are not reasonably expected to have a Material
Adverse Effect on MAI.
(b) Without limitation of Section 3.16(a), MAI and its Subsidiaries
have at all times operated their businesses in compliance with all applicable
federal, state and other fraud and abuse, anti-kickback ("Stark laws") and other
statutes, rules and regulations governing the provision of medical or related
services and/or payments or reimbursements for such services.
Section 3.17 Environmental Matters.
---------------------
(a) No notice, notification, demand, request for information,
citation, summons or order has been received by, no complaint has been filed
against, no penalty has been assessed against, and no investigation, action,
claim, suit, proceeding or review is pending or, to the knowledge of MAI or any
Subsidiary of MAI, is threatened by any Person against, MAI or any Subsidiary of
MAI with respect to any matters relating to or arising out of any Environmental
Law;
(b) No Hazardous Substance has been discharged, disposed of,
dumped, injected, pumped, deposited, spilled, leaked, emitted or released, in
violation of any Environmental Law, at, on, under or adjacent to any property
now or, to the knowledge of MAI, previously owned, leased or operated by MAI or
any Subsidiary of MAI; and
(c) There are no Environmental Liabilities.
(d) For purposes of this Section 3.17, the following terms shall
have the meanings set forth below:
(i) "MAI" and "Subsidiary of MAI" shall include any entity which
is, in whole or in part, a predecessor of MAI or any of its Subsidiaries.
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(ii) "Environmental Laws" means any and all federal, state, local
and foreign law (including common law), treaty, judicial decision,
regulation, rule, judgment, order, decree, injunction, permit, or
governmental restrictions or any agreement with any governmental authority
or other third party, relating to human health and safety, the physical
condition of any real property now or formerly owned, leased or operated by
MAI of any of its Subsidiaries or of any improvements thereon, the
environment or to pollutants, contaminants, wastes or chemicals or toxic,
radioactive, ignitable, corrosive, reactive or otherwise hazardous
substances, wastes or materials, including without limitation Hazardous
Substances as defined herein.
(iii) "Environmental Liabilities" means any and all liabilities of or
relating to MAI or any Subsidiary of MAI of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, which
(A) arise under or relate to matters covered by Environmental Laws, and (B)
arise from actions occurring or conditions existing on or prior to the
Effective Time.
(iv) "Hazardous Substances" means any pollutant, contaminant, waste
or chemical or any toxic, radioactive, corrosive, reactive or otherwise
hazardous substance, waste or material, or any substance having any
constituent elements displaying any of the foregoing characteristics,
including, without limitation, petroleum, its derivatives, by-products and
other hydrocarbons, or any substance, waste or material regulated under any
Environmental Laws.
Section 3.18 Assets. The assets, properties, rights and contracts,
------
including (as applicable) title or leaseholds thereto, of MAI and its
Subsidiaries, taken as a whole, are sufficient to permit MAI and its
Subsidiaries to conduct their respective businesses as currently being
conducted. Neither MAI nor any of its Subsidiaries owns any real property.
Section 3.19 Intellectual Property Rights.
----------------------------
(a) Except as disclosed in Schedule 3.19 to the MAI Disclosure
Letter, MAI and its Subsidiaries own or have the right to use all Intellectual
Property individually or in the aggregate material to the conduct of the
businesses of MAI and its Subsidiaries. To the knowledge of MAI, (i) neither MAI
nor any Subsidiary of MAI is in default (or with the giving of notice or lapse
of time or both would be in default) under any license to use such Intellectual
Property, (ii) such Intellectual Property (other than patents) is not being
infringed by any third party, and (iii) neither MAI nor any Subsidiary of MAI is
infringing any intellectual property of any third party. For purposes of this
Agreement, "Intellectual Property" means patents and patent rights, trademarks
and trademark rights, service marks and service mark rights, trade names and
trade name rights, copyrights and copyright rights and other proprietary
intellectual property rights and all pending applications for and registrations
of any of the foregoing that MAI or its Subsidiaries own, license or otherwise
have the right to use. An accurate schedule of all Intellectual Property of MAI
or its Subsidiaries consisting of patents, registered trademarks, registered
service marks, registered trade names and registered copyrights and all pending
applications therefor is set forth on Schedule 3.19 to the MAI Disclosure
Letter.
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(b) Either MAI or one of its Subsidiaries is listed in the
records of the appropriate United States, state or foreign agency as the sole
owner of record for each application and registration included in the
Intellectual Property, other than Intellectual Property of which MAI or its
Subsidiaries is a licensee.
(c) MAI and its Subsidiaries, with respect to all Intellectual
Property owned thereby, have taken or caused to be taken all reasonable steps in
the exercise of reasonable business judgment to obtain and retain valid and
enforceable Intellectual Property rights therein, including the submission of
all necessary filings in accordance with the legal and administrative
requirements of the appropriate jurisdictions. No application or registration
listed on Schedule 3.19 to the MAI Disclosure Letter is the subject of any
pending, existing or, to MAI's knowledge, threatened, opposition, interference,
cancellation proceeding or other legal or governmental proceeding before any
registration authority in any jurisdiction.
(d) The consummation of the transactions contemplated hereby will
not result in the loss or impairment of MAI's or any of its Subsidiaries' right
to own or use any of the Intellectual Property nor will it require the consent
of any Governmental Authority or third party.
Section 3.20 Labor Matters. MAI has previously furnished to DHS true and
-------------
complete copies of all labor and collective bargaining agreements (if any) to
which MAI or any of its Subsidiaries is a party and that are currently in
effect, together with all amendments thereto (if any). Since January 1, 1996,
there have been no strikes, slowdowns or other work stoppages or lockouts
involving any employees of MAI or any of its Subsidiaries and there are no
disputes by any labor organization in progress or pending or, to the knowledge
of MAI, threatened against MAI or any of its Subsidiaries that would have a
Material Adverse Effect on MAI. Except as disclosed in Schedule 3.20 to the MAI
Disclosure Letter, MAI and its Subsidiaries are in compliance in all material
respects with all applicable laws and regulations in respect of employment and
employment practices, terms and conditions of employment, wages and hours,
occupational safety, health or welfare conditions relating to premises occupied,
and civil rights. There are no charges of unfair labor practices pending before
any Governmental Authority involving or affecting MAI or any of its
Subsidiaries. As of the date of this Agreement, there is no representation claim
or petition pending before the National Labor Relations Board and, to the
knowledge of MAI, no question concerning representation exists with respect to
the employees of MAI or any of its Subsidiaries. MAI has not received notice
that any customer or supplier of MAI or any or its Subsidiaries is involved in
or threatened with or affected by any strike or other labor disturbance or
dispute, litigation or administrative proceeding or judgment, order, injunction,
decree or award, the consequences of which would have a Material Adverse Effect
on MAI.
Section 3.21 Transactions with Affiliates. Except to the extent disclosed
----------------------------
in the MAI SEC Documents filed prior to the date of this Agreement, none of the
officers or directors of MAI or any of its Subsidiaries nor any of its
Affiliates, and, to MAI's knowledge, none of its key employees or the key
employees of any of its Subsidiaries, is a party to any transaction with MAI or
any of its Subsidiaries (other than for services as an employee, officer or
director and other than transactions between MAI and one or more of its direct
or indirect wholly-owned
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Subsidiaries or between such Subsidiaries), including, without limitation, any
contract, agreement or other arrangement (a) providing for the furnishing of
services to or by, (b) providing for rental of real or personal property to or
from, or (c) otherwise requiring payments to or from, any such officer,
director, Affiliate or key employee, any member of the family of any such
officer, director or key employee or any corporation, partnership, trust or
other entity in which any such officer, director or key employee has substantial
interest (excluding the ownership of not more than two percent (2%) of the
capital stock of a publicly traded corporation) or which is an Affiliate of such
officer, director or key employee.
Section 3.22 Insurance. Schedule 3.22 to the MAI Disclosure Letter sets
---------
forth a complete and accurate list of all primary, excess and umbrella policies,
bonds and other forms of insurance currently owned or held by or on behalf of or
providing insurance coverage to MAI or any of its Subsidiaries and their
respective businesses, properties and assets (or its directors, officers, agents
or employees). All such policies are in full force and effect. Neither MAI nor
any of its Subsidiaries has received notice of default under any such policy, or
has received written notice of any pending or threatened termination or
cancellation, coverage limitation or reduction, or material premium increase
with respect to any such policy, the failure of which to maintain has a Material
Adverse Effect on MAI. Schedule 3.22 to the MAI Disclosure Letter sets forth a
complete and accurate summary of all of the self-insurance coverage provided by
MAI or any of its Subsidiaries and no letters of credit have been posted in
respect thereof.
Section 3.23 Takeover Statutes. Except for the Business Combination Act
-----------------
set forth in Article 13 of the Texas Business Corporation Act, no "fair price",
"moratorium", "control share acquisition" or other similar antitakeover statute
or regulation enacted under state or federal laws in the United States (each, a
"Takeover Statute") applicable to MAI or any of its Subsidiaries is applicable
to the Merger or the other transactions contemplated hereby.
Section 3.24 Finders' Fees. Except as disclosed in Schedule 3.24 to the
-------------
MAI Disclosure Letter, no investment banker, broker, finder, other intermediary
or other Person is entitled to any fee or commission from MAI or any Subsidiary
of MAI upon consummation of the transactions contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DHS
DHS represents and warrants to MAI that:
Section 4.01 Organization and Power. Each of DHS and its Subsidiaries is
----------------------
a corporation, partnership or other entity duly organized, validly existing and,
except as disclosed on Schedule 4.01 to the DHS Disclosure Letter, in good
standing under the laws of the jurisdiction of its incorporation or
organization, and has the requisite corporate or other power and authority and
governmental approvals to own, lease and operate its properties and to carry on
its business as now being conducted. Each of DHS and its Subsidiaries is duly
qualified or licensed to do business and, except as disclosed on Schedule 4.01
to the DHS Disclosure Letter, is in good standing in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or licensing necessary, except where
the
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failure to be so duly qualified or licensed and in good standing would not,
individually or in the aggregate, have a Material Adverse Effect on DHS.
Schedule 4.01 to the DHS Disclosure Letter sets forth (a) the name and
jurisdiction of incorporation of each Subsidiary of DHS, (b) its authorized
capital stock, (c) the number of issued and outstanding shares of its capital
stock, and (d) the record and beneficial owners of such shares. Except as set
forth on Schedule 4.01 to the DHS Disclosure Letter, DHS does not directly or
indirectly own any equity or similar interest in, or any interest convertible
into or exchangeable or exercisable for, any equity or similar interest in, any
Person. DHS has heretofore delivered to MAI true and complete copies of the
certificate or articles of incorporation and by-laws as currently in effect of
DHS and its Subsidiaries.
Section 4.02 Corporate Authorization. The execution, delivery and
-----------------------
performance by DHS and Merger Subsidiary of this Agreement and the consummation
by DHS and Merger Subsidiary of the transactions contemplated hereby are within
the corporate power of DHS and Merger Subsidiary and, except for the required
approval by the stockholders of DHS of the issuance of shares of DHS Common
Stock in connection with the Merger, have been duly authorized by all necessary
corporate action, including, without limitation, authorization and approval of
the Board of Directors of Merger Subsidiary and the Board of Directors of DHS,
in its capacity as the Board of Directors of DHS and in its capacity as the sole
stockholder of Merger Subsidiary. This Agreement has been duly executed and
delivered by each of DHS and Merger Subsidiary and, subject to the approval of
the holders of DHS Common Stock with respect to the issuance of shares of DHS
Common Stock in connection with the Merger (including any shares contemplated by
Sections 1.04 and 1.05), constitutes a legal, valid and binding agreement of
each of DHS and Merger Subsidiary, enforceable against DHS or Merger Subsidiary,
as applicable, in accordance with its terms (subject to applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and other similar
laws affecting creditors' rights generally from time to time in effect and to
general principles of equity, regardless of whether in a proceeding in equity or
at law). The shares of DHS Common Stock issued in connection with the Merger,
when issued in accordance with the terms hereof, will be duly authorized,
validly issued, fully paid and nonassessable and not subject to preemptive
rights.
Section 4.03 Governmental Authorization. The execution, delivery and
--------------------------
performance by DHS and Merger Subsidiary of this Agreement, and the consummation
by DHS and Merger Subsidiary of the transactions contemplated hereby, require no
action by or in respect of, or filing with or notice to, any Governmental
Authority, other than (a) the filing of articles of merger with respect to the
Merger with the Texas Secretary of State; (b) compliance with any applicable
requirements of the HSR Act, provided that nothing contained in this Agreement
shall be deemed to constitute an acknowledgment that any requirements under the
HSR Act are applicable to the transactions contemplated by this Agreement; (c)
compliance with any applicable requirements of the 1933 Act; (d) compliance with
any applicable requirements of the 1934 Act; and (e) compliance with any other
applicable securities laws.
Section 4.04 Non-Contravention. Except as set forth on Schedule 4.04 to
-----------------
the DHS Disclosure Letter, the execution, delivery and performance by DHS and
Merger Subsidiary of this Agreement do not, and the consummation by DHS and
Merger Subsidiary of the transactions
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contemplated hereby will not, require the consent of any other Person, or
conflict with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, result in or give to any
Person any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of any
Lien on any of the assets or properties of DHS or any of its Subsidiaries under,
any of the terms, conditions or provisions of (a) the certificate or articles of
incorporation, by-laws or similar organizational documents of DHS or any of its
Subsidiaries, (b) assuming receipt of the approval of stockholders referred to
in Section 4.02, and compliance with the matters referred to in Section 4.03,
any Laws or Orders binding upon or applicable to DHS or any Subsidiary of DHS or
any of their respective assets or properties, or (c) any note, bond, mortgage,
security agreement, indenture, lease, contract, instrument or other agreement of
any kind to which DHS or any Subsidiary of DHS is a party or by which DHS or any
Subsidiary of DHS or any of their respective assets or properties is bound (a
"DHS Agreement") or any license, franchise, permit or other similar
authorization held by DHS or any Subsidiary of DHS.
Section 4.05 Capitalization of DHS.
---------------------
(a) The authorized capital stock of DHS consists of 50,000,000
shares of DHS Common Stock, par value $0.001 per share, and 10,000,000 share of
preferred stock, par value $0.001 per share (the "DHS Preferred Stock"). As of
the close of business on December 31, 1998, (i) 11,480,636 shares of DHS Common
Stock were issued and outstanding, 233,259 shares of DHS Common Stock were
issued and held in the treasury of DHS, and an aggregate of 2,321,975 shares of
DHS Common Stock were reserved for issuance under DHS' 1992 Stock Option Plan,
1995 Non-Qualified Stock Option Plan, 1995 Incentive Stock Option Plan and 1997
Non-Qualified Stock Option Plan (collectively, the "DHS Plans"); (ii) options to
purchase 1,821,051 shares of DHS Common Stock under the DHS Plans ("DHS
Options") were outstanding; and (iii) 746,500 shares of DHS Preferred Stock were
outstanding. All of the outstanding shares of DHS Common Stock are, and all
shares reserved for issuance will be, when issued in accordance with the terms
specified in the instruments or agreements pursuant to which they are issuable,
duly authorized, validly issued, fully paid and non-assessable. Except (A) as
set forth in this Section 4.05 or in Schedule 4.05 to the DHS Disclosure Letter,
(B) for DHS Common Stock that may be issued as provided in Section 5.02(f), and
(C) for the transactions contemplated by this Agreement (including those
permitted in Article II), there are outstanding (w) no shares of capital stock
or other voting securities of DHS, (x) no securities of DHS convertible into or
exchangeable for shares of capital stock or voting securities of DHS, (y) no
options, warrants or other rights to acquire from DHS, and no preemptive or
similar rights, subscriptions or other rights, convertible securities,
agreements, arrangements or commitments of any character, obligating DHS to
issue, transfer or sell, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of DHS
or obligating DHS to grant, extend or enter into any such option, warrant,
subscription or other right, convertible security, agreement, arrangement or
commitment, and (z) no restricted stock awards, stock appreciation rights,
performance share agreements or stock unit awards of DHS (the items in clauses
(w), (x), (y) and (z) being referred to collectively as the "DHS Securities").
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(b) Except as set forth on Schedule 4.05 to the DHS Disclosure
Letter, (i) there are no voting trusts or other agreements or understandings to
which DHS or any Subsidiary of DHS is a party with respect to the voting of the
capital stock of DHS or any Subsidiary of DHS, (ii) no Person has or is entitled
to any registration rights in respect of any DHS Securities, and (iii) none of
DHS or its Subsidiaries has any contractual obligation to redeem, repurchase or
otherwise acquire any DHS Securities or any capital stock of any Subsidiary of
DHS, including as a result of the transactions contemplated by this Agreement,
or to provide funds to, or to make any investment in, any Subsidiary of DHS or
any other Person. Except as permitted by this Agreement, following the Merger,
DHS will not have any obligation to issue, transfer or sell any shares of its
capital stock pursuant to any employee benefit plan or otherwise.
Section 4.06 Capitalization of Subsidiaries. Except as set forth on
------------------------------
Schedule 4.06 to the DHS Disclosure Letter, all of the outstanding shares of
capital stock of, or other ownership interests in, each Subsidiary of DHS, are
duly authorized, validly issued, fully paid and non-assessable and are owned
beneficially, and of record, by DHS, directly or indirectly, free and clear of
any consensual Lien (including any restriction on the right to vote, sell or
otherwise dispose of such capital stock or other ownership interests). There are
no (a) outstanding securities of DHS or any Subsidiary of DHS convertible into
or exchangeable for shares of capital stock or other voting securities or
ownership interests in any Subsidiary of DHS, or (b) options, warrants or other
rights to acquire from DHS or any Subsidiary of DHS, and no other obligation of
DHS or any Subsidiary of DHS to issue, any capital stock, voting securities or
other ownership interests in, or any securities convertible into or exchangeable
for, any capital stock, voting securities or ownership interests in, any
Subsidiary of DHS (the items in clauses (a) and (b) being referred to
collectively as the "DHS Subsidiary Securities").
Section 4.07 SEC Filings.
-----------
(a) DHS has filed all reports, schedules, forms, statements and
other documents with the SEC required to be filed by DHS since January 1, 1996
(the "DHS SEC Documents").
(b) As of its filing date, each DHS SEC Document filed pursuant
to the 1934 Act complied as to form in all material respects with the 1934 Act
and did not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(c) Each DHS SEC Document that is a registration statement, as
amended or supplemented, if applicable, filed pursuant to the 1933 Act as of the
date such registration statement or amendment became effective complied as to
form in all material respects with the requirements of the 1933 Act and did not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 4.08 Financial Statements.
--------------------
(a) The audited consolidated financial statements included in
DHS' Annual
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Report on Form 10-K for the fiscal year ended December 31, 1997 (the "DHS 10-K")
and the unaudited consolidated interim financial statements of DHS included in
the DHS SEC Documents filed after such date (collectively, the "DHS Financial
Statements") complied, or will comply, as to form in all material respects with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position of DHS and its consolidated
Subsidiaries as of the dates thereof and their consolidated results of
operations and cash flows for the periods then ended (subject to footnote
disclosures and normal year-end adjustments in the case of any unaudited interim
financial statements). The DHS Financial Statements have been prepared from and
are consistent with the books and records of DHS, which reflect all material
transactions of DHS and its Subsidiaries. For purposes of this Agreement, "DHS
Balance Sheet" means the consolidated balance sheet of DHS as of December 31,
1997 set forth in the DHS 10-K and "DHS Balance Sheet Date" means December 31,
1997.
(b) Without limitation of Section 4.08(a), (i) DHS or its
Subsidiaries has good and marketable title to all of the assets reflected in the
balance sheet of DHS included in it quarterly report on form 10-Q for the
quarter ended September 30, 1998 (the "Most Recent DHS Balance Sheet") free and
clear of all liens, security interests, encumbrances or other adverse claims
other than liens of secured lenders disclosed in the footnotes to the Most
Recent DHS Balance Sheet and interests of lessors in respect of capitalized
leases, (ii) the reserve for doubtful accounts reflected in the Most Recent DHS
Balance Sheet is adequate and in accordance with GAAP, (iii) the inventories
reflected in the Most Recent DHS Balance Sheet have been valued at the lower of
cost or market, and are not materially in excess of the normal requirement of
DHS' business, and (iv) all equipment and other fixed assets reflected in the
Most Recent DHS Balance Sheet are in good operating condition (reasonable wear
and tear excepted); all of the representations in this Section 4.08(b) being
subject to the collection of accounts receivable, sale and use of inventory, and
disposition of obsolete equipment, in the ordinary course of business.
Section 4.09 Information Supplied. None of the information supplied or
--------------------
to be supplied by DHS for inclusion or incorporation by reference in and none of
the statements based on such information contained in (a) the Proxy Statement
will, at the date the Proxy Statement is first mailed to stockholders and at the
time of the meetings of such stockholders in connection with the Merger, contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, or (b) the Form S-4 will, at the
time the Form S-4 becomes effective under the 1933 Act or at the Effective Time,
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Section 4.10 Absence of Certain Changes. Except as disclosed in the DHS
--------------------------
SEC Documents filed prior to the date of this Agreement or as disclosed on
Schedule 4.10 to the DHS Disclosure Letter, since September 30, 1998, DHS and
its Subsidiaries have conducted their respective businesses in the ordinary
course consistent with past practice and there has not been:
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(a) Any material transaction of DHS or any of its Subsidiaries
outside of the normal course of business, any damage or destruction (whether or
not covered by insurance) of any material assets of DHS or any of its
Subsidiaries, or any event, occurrence or development which, individually or in
the aggregate, has had or would be reasonably likely to have a Material Adverse
Effect on DHS;
(b) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of DHS, any
issuance of DHS Common Stock other than upon exercise of DHS Options, or any
repurchase, redemption or other acquisition by DHS or any Subsidiary of DHS of
any amount of outstanding shares of capital stock or other equity securities of,
or other ownership interests in, DHS or any Subsidiary of DHS;
(c) any amendment of any term of any DHS Securities or any DHS
Subsidiary Securities;
(d) (i) any incurrence or assumption by DHS or any Subsidiary of
DHS of any indebtedness for borrowed money other than under existing credit
facilities in the ordinary course of business consistent with past practices, or
(ii) any guarantee, endorsement or other incurrence or assumption of liability
(whether directly, contingently or otherwise) by DHS or any Subsidiary of DHS
for the obligations of any other Person (other than any wholly-owned Subsidiary
of DHS);
(e) any creation or assumption by DHS or any Subsidiary of DHS of
any consensual Lien on any material asset of DHS or any Subsidiary of DHS;
(f) any making of any loan, advance or capital contribution to or
investment in any Person by DHS or any Subsidiary of DHS other than (i) loans,
advances or capital contributions to or investments in wholly-owned Subsidiaries
of DHS, or (ii) loans or advances to employees of DHS or any Subsidiary of DHS
made in the ordinary course of business consistent with past practice;
(g) (i) any contract or agreement entered into by DHS or any
Subsidiary of DHS on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business, or (ii) any modification,
amendment, assignment, termination or relinquishment by DHS or any Subsidiary of
DHS of any contract, license or other right (including any insurance policy
naming it as a beneficiary or a loss payable payee) that would be reasonably
likely to have a Material Adverse Effect on DHS, other than those contemplated
by this Agreement;
(h) any change in any method of accounting or accounting
principles or practices by DHS or any Subsidiary of DHS, except for any such
change required by reason of a change in GAAP; or
(i) any (i) grant of any severance or termination pay to any
director, officer or employee of DHS or any of its Subsidiaries, (ii) entering
into of any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement)
28
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with any director, officer or employee of DHS or any of its Subsidiaries, (iii)
increase in benefits payable under any existing severance or termination pay
policies or employment agreements, or (iv) increase in rates of compensation or
bonus in excess of five (5%) percent or increase in other benefits payable to
officers or employees of DHS or any of its Subsidiaries or increase in
compensation, bonus or other benefits payable to directors of DHS or any of its
Subsidiaries.
Section 4.11 No Undisclosed Liabilities. Neither DHS nor any Subsidiary
--------------------------
of DHS has any material liabilities or obligations (whether pursuant to
contracts or otherwise) of any kind whatsoever whether, accrued, contingent,
absolute, determined, determinable or otherwise, except:
(a) those liabilities and obligations set forth on the DHS
Balance Sheet and not heretofore paid or discharged;
(b) those liabilities and obligations incurred since September
30, 1998 in the ordinary course of business consistent with past practice; and
(c) those liabilities or obligations under this Agreement or
incurred in connection with the transactions contemplated hereby.
Section 4.12 Litigation. Except as disclosed on Schedule 4.12 to the DHS
----------
Disclosure Letter, (a) there are no actions, suits, arbitrations, or proceedings
pending or, to the knowledge of DHS, threatened against, relating to or
affecting, nor are there any Governmental Authority investigations or audits
pending or, to the knowledge of DHS, threatened against, relating to or
affecting, DHS or any of its Subsidiaries or any of their respective assets or
properties nor, to the knowledge of DHS, is there any valid basis for any such
action, suit, arbitration, proceeding, investigation or audit, which if
adversely determined, would have a Material Adverse Effect on DHS, and (b)
neither DHS nor any of its Subsidiaries is subject to any order of any
Governmental Authority which adversely affects the ability of DHS to consummate
the transactions contemplated by this Agreement.
Section 4.13 Taxes.
-----
(a) All Tax Returns required to be filed by DHS, any of its
Subsidiaries, or any corporation that was included in the filing of a return
with DHS or its Subsidiaries on a consolidated, combined or unitary basis have
been filed (the "DHS Tax Returns") and all Taxes required to be shown on the DHS
Tax Returns, or a subsequent assessment with respect thereto, or otherwise due
or payable (to the extent in excess of $50,000 in the aggregate) have been paid
and any penalties and interest relating to such Taxes have been paid. No other
Taxes (to the extent in excess of $50,000 in the aggregate) are payable by the
DHS Group with respect to items or periods covered by such Tax Returns or with
respect to Tax periods prior to the date of this Agreement. None of the DHS Tax
Returns contain, or are required to contain, a disclosure statement under
Section 6662 of the Code, or any similar provision of state, local or foreign
law, with respect to any items that relate to DHS or its Subsidiaries in order
to avoid a penalty for any taxable year. All DHS Tax Returns are true, correct
and complete in all material respects. DHS
29
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has made available to MAI correct and complete copies of all DHS Tax Returns for
all periods which are not closed by the statute of limitations.
(b) No adjustment relating to any DHS Tax Return has been
proposed formally or, to DHS' knowledge, informally by any Governmental
Authority (to the extent in excess of $50,000 in the aggregate), and no basis
exists for any such adjustment that would have a Material Adverse Effect on DHS.
There are no outstanding subpoenas or requests for information with respect to
any DHS Tax Returns or portions thereof. There are no pending or, to DHS'
knowledge, threatened actions or proceedings for the assessment or collection of
Taxes for which DHS or its Subsidiaries may be liable (to the extent in excess
of $50,000 in the aggregate). There are no Tax liens on any assets of DHS or its
Subsidiaries, except with respect to Taxes which are not yet due and payable.
(c) No consent under Section 341(f) of the Code has been filed
with respect to DHS or any of its Subsidiaries. Neither DHS nor any of its
Subsidiaries is or has been subject to the dual consolidated loss provisions of
Section 1503 of the Code.
(d) DHS and its Subsidiaries are members of an affiliated group
(within the meaning of Section 1504 of the Code) that is eligible to file a
consolidated return. No other entity is or has been eligible to file a
consolidated or combined return with DHS and its Subsidiaries, and neither DHS
nor its Subsidiaries have filed or consented to the filing of any Federal or
state consolidated or combined return with any entity not a member of the DHS
Group. Neither DHS nor any of its Subsidiaries has been at any time a member of
any partnership or joint venture or the holder of a beneficial interest in any
trust for any Person for which the statute of limitations for any Tax
potentially applicable as a result of such membership or holding has not
expired.
(e) DHS and its Subsidiaries have properly accrued all current or
contested Taxes (to the extent in excess of $50,000 in the aggregate) on their
books and records, and their books and records reflect reserves that are
adequate for the payment of all Taxes (to the extent in excess of $50,000 in the
aggregate) not yet due and payable that are properly accruable thereon through
the date of this Agreement (including Taxes being contested). Neither DHS nor
any of its Subsidiaries have any liability for any Taxes which, in the
aggregate, are more than $50,000 in excess of amounts accrued or the reserves
established. All Taxes (to the extent in excess of $50,000 in the aggregate)
required to be withheld, collected or deposited in connection with the
operations and activities of DHS or its Subsidiaries have been timely withheld,
collected or deposited and, to the extent required, have been paid to the
relevant taxing authority.
(f) DHS does not own, nor has it owned during the past five (5)
years, any capital stock of MAI. At the Effective Time, the fair market value of
the assets of DHS will exceed the sum of its liabilities, plus the amount of
other liabilities, if any, to which the assets are subject.
(g) There are no requests for rulings, determinations or
information currently outstanding with any Taxing Authority that could
reasonably be expected to affect the Taxes of DHS or any of its Subsidiaries.
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(h) The DHS Tax Returns have not been audited by the Service. There
are no outstanding waivers or agreements extending the statute of limitations
for any period with respect to any Tax to which DHS or any of its Subsidiaries
may be liable.
(i) The term "DHS Group" shall mean, individually and collectively,
(i) DHS, (ii) its Subsidiaries, and (iii) any trust, corporation, partnership or
any other entity as to which DHS or its Subsidiaries is liable for Taxes
incurred by such entity either as a transferee, or pursuant to Treasury
Regulations Section 1.1502-6, or pursuant to any other provision of federal,
state, local or foreign law or regulations.
(j) DHS has made available to MAI a true and complete copy of any (i)
elections, letter rulings and determination letters relating to Taxes with
respect to DHS or its Subsidiaries which were in effect or affected Taxes for
any periods which are not closed by the statute of limitations, and (ii)
examination reports, closing agreements and statements of deficiencies for Taxes
assessed against or agreed to by DHS or any of its Subsidiaries which were in
effect or affected Taxes for any periods which are not closed by the statute of
limitations.
Section 4.14 Employee Benefits; ERISA.
------------------------
(a) Except as set forth on Schedule 4.14 to the DHS Disclosure Letter,
there are no employee benefit plans (including any plans for the benefit of
directors or former directors), contracts or agreements (including employment
agreements and severance agreements, incentive compensation, bonus, stock
option, stock appreciation rights and stock purchase plans) of any type
(including plans described in Section 3(3) of ERISA), maintained by DHS, any of
its Subsidiaries or any trade or business, whether or not incorporated (an "DHS
ERISA Affiliate"), that together with DHS would be deemed a "controlled group"
within the meaning of Section 4001(a)(14) of ERISA, or with respect to which DHS
or any of its Subsidiaries has or may have a liability (the "DHS Benefit
Plans"). Except as disclosed on Schedule 4.14 to the DHS Disclosure Letter (or
as otherwise permitted by this Agreement), (i) neither DHS nor any ERISA
Affiliate has any plan or commitment, whether legally binding or not, to create
any additional DHS Benefit Plan or modify or change any existing DHS Benefit
Plan that would affect any employee or terminated employee of DHS or any ERISA
Affiliate, and (ii) since December 31, 1997, there has been no change,
amendment, modification to, or adoption of, any DHS Benefit Plan.
(b) With respect to each DHS Benefit Plan: (i) if intended to qualify
under Section 401(a), 401(k) or 403(a) of the Code, each such plan so qualifies,
and its trust is exempt from taxation under Section 501(a) of the Code; (ii) no
failures to administer such plan in accordance with its terms and applicable law
have occurred that have had or would reasonably be expected to have a Material
Adverse Effect on DHS; (iii) no breaches of fiduciary duty have occurred; (iv)
no prohibited transaction within the meaning of Section 406 of ERISA has
occurred; (v) as of the date of this Agreement, no lien imposed under the Code
or ERISA exists; and (vi) all contributions and premiums due (including any
extensions for such contributions and premiums) have been made in full or
adequate provision has been made therefor in the DHS Financial Statements.
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(c) None of the DHS Benefit Plans has incurred any "accumulated
funding deficiency," as such term is defined in Section 412 of the Code, whether
or not waived.
(d) Neither DHS nor any ERISA Affiliate has incurred any liability
under Title IV of ERISA (including Sections 4063-4064 and 4069 of ERISA) since
the effective date of ERISA that has not been satisfied in full.
(e) With respect to each DHS Benefit Plan that is a "welfare plan" (as
defined in Section 3(l) of ERISA), no such plan provides medical or death
benefits with respect to current or former employees of DHS or any of its
Subsidiaries beyond their termination of employment, other than as required by
law or on an employee-pay-all basis.
(f) The consummation of the Merger pursuant to this Agreement will not
(i) entitle any individual to severance pay or any tax "gross-up" payments with
respect to the imposition of any tax pursuant to Section 4999 of the Code or
accelerate the time of payment or vesting, or increase the amount, of
compensation or benefits due to any individual with respect to any DHS Benefit
Plan, or (ii) constitute or result in a prohibited transaction under Section
4975 of the Code or Section 406 or 407 of ERISA with respect to any DHS Benefit
Plan.
(g) There is no DHS Benefit Plan that is a "multiemployer plan," as
such term is defined in Section 3(37) of ERISA, or which is covered by Section
4063 or 4064 of ERISA.
Section 4.15 Certain Agreements; Compliance with Agreements.
----------------------------------------------
(a) Except as disclosed on Schedule 4.15 to the DHS Disclosure Letter
or as provided for in this Agreement, neither DHS nor any of its Subsidiaries is
a party to or bound by any oral or written:
(i) consulting agreement not terminable on thirty (30) days' or
less notice;
(ii) agreement with any officer or other key employee the benefits
of which are contingent, or the terms of which are materially altered, upon
the occurrence of the transactions contemplated by this Agreement;
(iii) agreement with respect to any officer providing any term of
employment or compensation guarantee;
(iv) agreement or plan, including any stock option plan, stock
appreciation rights plan, employee stock ownership plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis
of any of the transactions contemplated by this Agreement;
(v) agreement containing covenants that limit the ability of DHS or
any of its Subsidiaries to compete in any line of business or with any
Person, or that involve any
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restriction on the geographic area in which, or method by which, DHS or any
of its Subsidiaries may carry on its business (other than as may be
required by law or any regulatory agency);
(vi) agreement, contract or understanding, other than this Agreement
and the certificate of incorporation and by-laws of DHS, regarding the
capital stock of DHS or committing to dispose of some or all of the capital
stock or all or substantially all of the assets of DHS;
(vii) partnership, joint venture or profit sharing agreement of DHS
or any of its Subsidiaries with any Person;
(viii) agreement, contract, commitment, indenture or other instrument
of DHS or any of its Subsidiaries relating to the borrowing of money, or
the direct or indirect guarantee of any obligation for, or an agreement to
service the repayment of, borrowed money, or any other contingent
obligation in respect to indebtedness of any other Person, including
without limitation any agreement or arrangement relating to the maintenance
of compensating balances, any agreement or arrangement with respect to
lines of credit, any agreement or arrangement to purchase or repurchase
obligations of any other Person, any agreement or arrangement to advance or
supply funds to or to invest in any other Person, any agreement or
arrangement to pay for property, products or services of any other Person
even if such property, products or services are not conveyed, delivered or
rendered, or any guarantee with respect to any lease or other similar
periodic payment to be made by any other Person;
(ix) lease of DHS or any of its Subsidiaries with annual rental
payments aggregating $50,000 or more;
(x) agreement, contract or commitment of DHS or any of its
Subsidiaries relating to the disposition or acquisition of any investment
in any Person if such investment has a book value of, or the disposition or
acquisition price of such investment or interest is, $50,000 or more;
(xi) agreement, contract or commitment which involves payment or
potential payment, pursuant to the terms of such agreement, contract or
commitment, by or to DHS or any of its Subsidiaries of $50,000 or more
within any twelve (12) month period commencing after the date hereof;
(xii) severance or similar agreement entered into or amended at any
time since June 30, 1998; or
(xiii) agreement, contract, commitment or arrangement between DHS or
any of its Subsidiaries and any Affiliate of DHS or any of its Subsidiaries
that is not described in or filed as an exhibit to a DHS SEC Document.
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(b) Neither DHS nor any of its Subsidiaries nor, to the knowledge of
DHS, any other party thereto is in breach or violation of or in default in the
performance or observance of any term or provision of, and no event has occurred
which, with notice or lapse of time or both, is reasonably expected to result in
a default under, (i) the certificates or articles of incorporation, by-laws or
similar organizational documents of DHS or any of its Subsidiaries, or (ii) any
contract, agreement, plan or instrument listed or required to be listed on
Schedule 4.15 to the DHS Disclosure Letter, except in the case of clause (ii)
for breaches, violations or defaults which, individually or in the aggregate,
are not having and are not reasonably expected to have a Material Adverse Effect
on DHS. No party to any such contract, agreement, plan or instrument will have
the right to terminate any or all of the provisions of any such contract, plan
or instrument as a result of the transactions contemplated by this Agreement.
(c) No outstanding purchase commitments of DHS or any of its
Subsidiaries is materially in excess of the reasonable requirements of their
respective business.
(d) Neither DHS or any of its Subsidiaries has received written notice
of any existing, announced or anticipated changes in the policies of any
material clients, customers, referral sources or suppliers which could
reasonably be expected to have a Material Adverse Effect on DHS.
Section 4.16 Compliance with Laws and Orders.
-------------------------------
(a) DHS and its Subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals of all Governmental Authorities necessary for
the lawful conduct of their respective businesses (the "DHS Permits"), except
for failures to hold such permits, licenses, variances, exemptions, orders and
approvals which, individually or in the aggregate, are not having and are not
reasonably expected to have a Material Adverse Effect on DHS. DHS and its
Subsidiaries are in compliance with the terms of the DHS Permits, except
failures so to comply which, individually or in the aggregate, are not having
and are not reasonably expected to have a Material Adverse Effect on DHS. DHS
and its Subsidiaries are not in violation of or default under any Laws or
Orders, except for such violations or defaults which, individually or in the
aggregate, are not having and are not reasonably expected to have a Material
Adverse Effect on DHS.
(b) Without limitation of Section 4.16(a), DHS and its Subsidiaries
have at all times operated their businesses in compliance with all applicable
federal, state and other fraud and abuse, anti-kickback ("Stark laws") and other
statutes, rules and regulations governing the provision of medical or related
services and/or payments or reimbursements for such services.
Section 4.17 Environmental Matters.
---------------------
(a) No notice, notification, demand, request for information,
citation, summons or order has been received by, no complaint has been filed
against, no penalty has been assessed against, and no investigation, action,
claim, suit, proceeding or review is pending or, to the knowledge of DHS or any
Subsidiary of DHS, is threatened by any Person, against DHS or
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any Subsidiary of DHS with respect to any matters relating to or arising out of
any Environmental Law;
(b) No Hazardous Substance has been discharged, disposed of, dumped,
injected, pumped, deposited, spilled, leaked, emitted or released, in violation
of any Environmental Law, at, on, under or adjacent to any property now or, to
the knowledge of DHS, previously owned, leased or operated by DHS or any
Subsidiary of DHS; and
(c) There are no Environmental Liabilities.
(d) For purposes of this Section 4.17, capitalized terms used shall
have the meanings assigned to them in Section 3.17(b), except that in all cases
the word "DHS" shall be substituted for the word "MAI".
Section 4.18 Assets. The assets, properties, rights and contracts,
------
including (as applicable) title or leaseholds thereto, of DHS and its
Subsidiaries, taken as a whole, are sufficient to permit DHS and its
Subsidiaries to conduct their respective businesses as currently being
conducted. Neither DHS nor any of its Subsidiaries owns any real property.
Section 4.19 Intellectual Property Rights.
----------------------------
(a) DHS and its Subsidiaries own or have the right to use all
Intellectual Property individually or in the aggregate material to the conduct
of the businesses of DHS and its Subsidiaries. To the knowledge of DHS, (i)
neither DHS nor any Subsidiary of DHS is in default (or with the giving of
notice or lapse of time or both would be in default) under any license to use
such Intellectual Property, (ii) such Intellectual Property (other than patents)
is not being infringed by any third party, and (iii) neither DHS nor any
Subsidiary of DHS is infringing any intellectual property of any third party.
An accurate schedule of all Intellectual Property of DHS or its Subsidiaries
consisting of patents, registered trademarks, registered service marks,
registered trade names and registered copyrights and all pending applications
therefor is set forth on Schedule 4.19 to the DHS Disclosure Letter.
(b) Either DHS or one of its Subsidiaries is listed in the records of
the appropriate United States, state or foreign agency as the sole owner of
record for each application and registration included in the Intellectual
Property, other than Intellectual Property of which DHS or its Subsidiaries is a
licensee.
(c) DHS and its Subsidiaries, with respect to all Intellectual
Property owned thereby, have taken or caused to be taken all reasonable steps in
the exercise of reasonable business judgement to obtain and retain valid and
enforceable Intellectual Property rights therein, including the submission of
all necessary filings in accordance with the legal and administrative
requirements of the appropriate jurisdictions. No application or registration
listed on Schedule 4.19 to the DHS Disclosure Letter is the subject of any
pending, existing or, to DHS' knowledge, threatened, opposition, interference,
cancellation proceeding or other legal or governmental proceeding before any
registration authority in any jurisdiction.
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(d) The consummation of the transactions contemplated hereby will not
result in the loss or impairment of DHS' or any of its Subsidiaries' right to
own or use any of the Intellectual Property nor will it require the consent of
any Governmental Authority or third party.
Section 4.20 Labor Matters. DHS has previously furnished to MAI true
-------------
and complete copies of all labor and collective bargaining agreements (if any)
to which DHS or any of its Subsidiaries is a party and that are currently in
effect, together with all amendments thereto (if any). Since January 1, 1996,
there have been no strikes, slowdowns or other work stoppages or lockouts
involving any employees of DHS or any of its Subsidiaries and there are no
disputes by any labor organization in progress or pending or, to the knowledge
of DHS, threatened against DHS or any of its Subsidiaries that would have a
Material Adverse Effect on DHS. DHS and its Subsidiaries are in compliance in
all material respects with all applicable laws and regulations in respect of
employment and employment practices, terms and conditions of employment, wages
and hours, occupational safety, health or welfare conditions relating to
premises occupied, and civil rights. There are no charges of unfair labor
practices pending before any Governmental Authority involving or affecting DHS
or any of its Subsidiaries. As of the date of this Agreement, there is no
representation claim or petition pending before the National Labor Relations
Board and, to the knowledge of DHS, no question concerning representation exists
with respect to the employees of DHS or any of its Subsidiaries. DHS has not
received notice that any customer or supplier of DHS or any or its Subsidiaries
is involved in or threatened with or affected by any strike or other labor
disturbance or dispute, litigation or administrative proceeding or judgment,
order, injunction, decree or award, the consequences of which would have a
Material Adverse Effect on DHS.
Section 4.21 Transactions with Affiliates. Except to the extent
----------------------------
disclosed in the DHS SEC Documents filed prior to the date of this Agreement,
none of the officers or directors of DHS or any of its Subsidiaries nor any of
its Affiliates, and, to DHS' knowledge, none of its key employees or the key
employees of any of its Subsidiaries, is a party to any transaction with DHS or
any of its Subsidiaries (other than for services as an employee, officer or
director and other than transactions between DHS and one or more of its direct
or indirect wholly owned Subsidiaries or between such Subsidiaries), including,
without limitation, any contract, agreement or other arrangement (a) providing
for the furnishing of services to or by, (b) providing for rental of real or
personal property to or from, or (c) otherwise requiring payments to or from,
any such officer, director, Affiliate or key employee, any member of the family
of any such officer, director or key employee or any corporation, partnership,
trust or other entity in which any such officer, director or key employee has
substantial interest (excluding the ownership of not more than two percent (2%)
of the capital stock of a publicly traded corporation) or which is an Affiliate
of such officer, director or key employee.
Section 4.22 Insurance. Schedule 4.22 to the DHS Disclosure Letter sets
---------
forth a complete and accurate list of all primary, excess and umbrella policies,
bonds and other forms of insurance currently owned or held by or on behalf of or
providing insurance coverage to DHS or any of its Subsidiaries and their
respective businesses, properties and assets (or its directors, officers, agents
or employees). All such policies are in full force and effect. Neither DHS nor
any of its Subsidiaries has received notice of default under any such policy, or
has received
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written notice of any pending or threatened termination or cancellation,
coverage limitation or reduction, or material premium increase with respect to
any such policy, the failure of which to maintain has a Material Adverse Effect
on DHS. Schedule 4.22 to the DHS Disclosure Letter sets forth a complete and
accurate summary of all of the self-insurance coverage provided by DHS or any of
its Subsidiaries and no letters of credit have been posted in respect thereof.
Section 4.23 Takeover Statutes. The Boards of Directors of DHS and
-----------------
Merger Subsidiary have duly and validly approved the Merger, this Agreement and
the transactions contemplated by this Agreement and such approval is sufficient
to render inapplicable to the Merger, this Agreement, and the transactions
contemplated by this Agreement and the Voting Agreement, the provisions of
Section 203 of the Delaware General Corporation Law (the "Delaware Law"). No
other Takeover Statute applicable to DHS or any of its Subsidiaries is
applicable to the Merger or the other transactions contemplated hereby.
Section 4.24 Finders' Fees. Except for a fee payable to Prudential
-------------
Securities Incorporated, a copy of whose engagement agreement has been provided
to MAI, no investment banker, broker, finder, other intermediary or other Person
is entitled to any fee or commission from DHS or any Subsidiary of DHS upon
consummation of the transactions contemplated by this Agreement.
ARTICLE V
COVENANTS
Section 5.01 Conduct of MAI. From the date hereof until the Effective
--------------
Time, except as otherwise expressly required by this Agreement or with the prior
written consent of DHS, MAI shall conduct, and shall cause its Subsidiaries to
conduct, their respective businesses in the ordinary course consistent with past
practice and shall use commercially reasonable efforts to preserve intact
commercially reasonable organizations and relationships with customers,
suppliers, creditors and business partners and shall use their reasonable
efforts to keep available the services of their present officers and employees.
Without limiting the generality of the foregoing, from the date hereof until the
Effective Time, except as described in Schedule 5.01 to the MAI Disclosure
Letter, without the prior written approval of DHS (which approval will not be
unreasonably withheld or delayed with respect to (c), (d), (h), (i), (j), (n) or
(o), or (k) as it applies to filing any amended Tax Return):
(a) MAI will not adopt or propose any change in its articles of
incorporation or any change in its by-laws;
(b) MAI will not, and will not permit any Subsidiary of MAI to, adopt
a plan or agreement of complete or partial liquidation, or resolutions providing
for or authorizing such liquidation or a dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of MAI or any of its
Subsidiaries (other than a liquidation or dissolution of any Subsidiary or a
merger or consolidation between wholly-owned Subsidiaries);
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(c) MAI will not, and will not permit any Subsidiary of MAI to, make
any investment in or any acquisition of the business of any Person or any
material amount of assets (other than inventory);
(d) MAI will not, and will not permit any Subsidiary of MAI to, sell
or otherwise dispose of any assets (other than inventory) in an amount that
would be material to MAI and its Subsidiaries, taken as a whole, except in the
ordinary course of business consistent with past practice;
(e) MAI will not, and will not permit any Subsidiary of MAI to,
declare, set aside or pay any dividend or other distribution payable in cash,
stock or property with respect to its capital stock other than dividends paid by
any Subsidiary of MAI to MAI or any other Subsidiary of MAI, or split, combine,
reclassify or take similar action with respect to any of its capital stock or
MAI Securities or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of its
capital stock or MAI Securities;
(f) MAI will not, and will not permit any Subsidiary of MAI to, issue,
deliver, sell, transfer, pledge, dispose of or encumber any shares of, or
securities convertible into or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of capital stock of any
class or series of MAI or its Subsidiaries, or issue or grant any restricted
stock awards, stock appreciation rights, performance share agreements or stock
unit awards, other than (i) the issuance of options with an exercise price at
least equal to the fair market value of the MAI Common Stock on the date of
grant for up to 75,000 shares of MAI Common Stock under the MAI Option Plan as
in effect on the date hereof, and (ii) issuances of MAI Common Stock pursuant to
the exercise of options granted pursuant to the MAI Option Plan and the exercise
of MAI Warrants described in Section 3.05(a) which are outstanding on the date
hereof or are hereafter issued pursuant to the foregoing clause (i); and MAI
will not amend the terms of any option, warrant, right or other security
outstanding on the date hereof;
(g) MAI will not, and will not permit any Subsidiary of MAI to,
redeem, purchase or otherwise acquire directly or indirectly any of MAI's
capital stock or any MAI Securities;
(h) MAI will not, and will not permit any Subsidiary of MAI to, enter
into or amend in any material respect any employment contract with any of its
officers, directors or employees earning annual compensation of more than
$50,000, adopt or amend any MAI Benefit Plan in any material respect or make any
payments, awards or distributions under any MAI Benefit Plan or otherwise not
consistent with past practice or custom except (i) as required by a contract in
existence on the date hereof and listed on Schedule 3.15 to the MAI Disclosure
Letter, or (ii) as necessary to make any MAI Benefit Plan listed on Schedule
3.14 to the MAI Disclosure Letter meet the requirements of ERISA to the extent
such amendment is described in such Schedule or is approved by DHS;
(i) MAI will not, and will not permit any Subsidiary of MAI to, (i)
enter into (or commit to enter into) any new lease or renew any existing lease
of real property (except
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pursuant to commitments for such lease or lease renewal entered into prior to
the date hereof), or (ii) purchase or acquire or enter into any agreement to
purchase or acquire any real estate;
(j) MAI will not, and will not permit any Subsidiary of MAI to, make
or commit to make any capital expenditures in excess of $500,000 in the
aggregate;
(k) MAI will not, and will not permit any Subsidiary of MAI to, change
any tax election, change any annual tax accounting period, change any method of
tax accounting, file any amended Tax Return, enter into any closing agreement
relating to any Tax, settle any Tax claim or assessment, surrender any right to
claim a Tax refund or consent to any extension or waiver (other than a
reasonable extension or waiver) of the limitations period applicable to any Tax
claim or assessment, if any such action would have the effect of increasing the
aggregate Tax liability or reducing the aggregate tax assets of MAI and its
Subsidiaries, taken as a whole;
(l) MAI will not, and will not permit any Subsidiary of MAI to, (i)
incur any indebtedness for borrowed money or guarantee any such indebtedness
other than in the ordinary course of its business consistent with past practice,
or (ii) voluntarily purchase, cancel, prepay or otherwise provide for a complete
or partial discharge in advance of a scheduled repayment date with respect to,
or waive any right under, any indebtedness for borrowed money;
(m) MAI will not, and will not permit any Subsidiary of MAI to, enter
into any contract or amend or modify any existing contract, or engage in any new
transaction outside the ordinary course of business consistent with past
practice or not on an arm's length basis, with any Affiliate of such party or
any of its Subsidiaries;
(n) MAI will not, and will not permit any Subsidiary of MAI to, agree
or commit to do any of the foregoing; and
(o) MAI will not, and will not permit any Subsidiary of MAI to, take
or agree or commit to take any action that would make any representation or
warranty of MAI in this Agreement inaccurate at, or as of any time prior to, the
Effective Time.
Section 5.02 Conduct of DHS. From the date hereof until the Effective
--------------
Time, except as otherwise expressly required by this Agreement or with the prior
written consent of MAI, DHS shall conduct, and shall cause its Subsidiaries to
conduct, their respective businesses in the ordinary course consistent with past
practice and shall use commercially reasonable efforts to preserve intact their
business organizations and relationships with customers, suppliers, creditors
and business partners and shall use their reasonable efforts to keep available
the services of their present officers and employees. Without limiting the
generality of the foregoing, from the date hereof until the Effective Time,
without the prior written approval of MAI (which approval will not be
unreasonably withheld or delayed with respect to (c), (d), (h), (i), (j), (n) or
(o), or (k) as it applies to filing any amended Tax Return):
(a) DHS will not adopt or propose any change in its certificate of
incorporation or any change in its by-laws, except (i) as and to the extent
required to consummate the Merger, and (ii) for the proposed change of the
corporate name of DHS to
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"Medical Alliance, Inc." at the Effective Time;
(b) DHS will not, and will not permit any Subsidiary of DHS to, adopt
a plan or agreement of complete or partial liquidation, or resolutions providing
for or authorizing such liquidation or a dissolution, merger, consolidation,
restructuring, recapitalization or other reorganization of DHS or any of its
Subsidiaries (other dm a liquidation or dissolution of any Subsidiary or a
merger or consolidation between wholly-owned Subsidiaries);
(c) DHS will not, and will not permit any Subsidiary of DHS to, make
any investment in or any acquisition of the business of any Person or any
material amount of assets (other than inventory);
(d) DHS will not, and will not permit any Subsidiary of DHS to, sell
or otherwise dispose of any assets (other than inventory) in an amount that
would be material to DHS and its Subsidiaries, taken as a whole, except in the
ordinary course of business consistent with past practice;
(e) DHS will not, and will not permit any Subsidiary of DHS to,
declare, set aside or pay any dividend or other distribution payable in cash,
stock or property with respect to its capital stock, other than dividends paid
by any Subsidiary of DHS to DHS or any other Subsidiary of DHS, or split,
combine, reclassify or take similar action with respect to any of its capital
stock or DHS Securities or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock of DHS Securities;
(f) DHS will not, and will not permit any Subsidiary of DHS to, issue,
deliver, sell, transfer, pledge, dispose of or encumber any shares of, or
securities convertible into or exchangeable for, or options, warrants, calls,
commitments or rights of any kind to acquire, any shares of capital stock of any
class or series of DHS or its Subsidiaries, or issue or grant any restricted
stock awards, stock appreciation rights, performance share agreements or stock
unit awards, other than (i) the issuance of options with an exercise price at
least equal to the fair market value of the DHS Common Stock on the date of
grant for up to 75,000 shares of DHS Common Stock under the DHS Plans as in
effect on the date hereof, and (ii) issuances pursuant to the exercise of
options granted pursuant to the DHS Plans described in Section 4.05(a) which are
outstanding on the date hereof or are hereafter issued pursuant to the foregoing
clause (i); and DHS will not amend the terms of any option, warrant, right or
other security outstanding on the date hereof, except for the extension of stock
options held by outgoing directors of DHS (provided that such extensions shall
not cause the expiration dates of such options to extend beyond the later of the
third anniversary of the Effective Time or the tenth (10th) anniversary of the
date of issuance of the subject options);
(g) DHS will not, and will not permit any Subsidiary of DHS to,
redeem, purchase or otherwise acquire directly or indirectly any of DHS' capital
stock or any DHS Securities;
(h) DHS will not, and will not permit any Subsidiary of DHS to, enter
into or
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amend in any material respect any employment contract with any of its officers,
directors or employees earning annual compensation of more than $50,000 (other
than as contemplated by Section 6.06), adopt or amend any DHS Benefit Plan in
any material respect or make any payments, awards or distributions under any DHS
Benefit Plan or otherwise not consistent with past practice or custom except (i)
as required by a contract in existence on the date hereof and listed on Schedule
4.15 to the DHS Disclosure Letter, or (ii) as necessary to make any DHS Benefit
Plan listed on Schedule 4.14 to the DHS Disclosure Letter meet the requirements
of the Code or ERISA to the extent such amendment is described in such Schedule
or is approved by MAI;
(i) DHS will not, and will not permit any Subsidiary of DHS to, (i)
enter into (or commit to enter into) any new lease or renew any existing lease
of real property (except pursuant to commitments for such lease or lease renewal
entered into prior to the date hereof), or (ii) purchase or acquire or enter
into any agreement to purchase or acquire any real estate;
(j) DHS will not, and will not permit any Subsidiary of DHS to, make
or commit to make any capital expenditures in excess of $750,000 in the
aggregate;
(k) DHS will not, and will not permit any Subsidiary of DHS to, change
any tax election, change any annual tax accounting period, change any method of
tax accounting, file any amended Tax Return, enter into any closing agreement
relating to any Tax, settle any Tax claim or assessment, surrender any right to
claim a Tax refund or consent to any extension or waiver (other than a
reasonable extension or waiver) of the limitations period applicable to any Tax
claim or assessment, if any such action would have the effect of increasing the
aggregate Tax liability or reducing the aggregate tax assets of MAI and its
Subsidiaries, taken as a whole;
(l) DHS will not, and will not permit any Subsidiary of DHS to, (i)
incur any indebtedness for borrowed money or guarantee any such indebtedness
other than in the ordinary course of its business consistent with past practice
or other than in connection with the transactions contemplated by this
Agreement, or (ii) voluntarily purchase, cancel, prepay or otherwise provide for
a complete or partial discharge in advance of a scheduled repayment date with
respect to, or waive any right under, any indebtedness for borrowed money;
(m) DHS will not, and will not permit any Subsidiary of DHS to, enter
into any contract or amend or modify any existing contract, or engage in any new
transaction outside the ordinary course of business consistent with past
practice or not on an arm's length basis, with any Affiliate of such party or
any of its Subsidiaries;
(n) DHS will not, and will not permit any Subsidiary of DHS to, agree
or commit to do any of the foregoing; and
(o) DHS will not, and will not permit any Subsidiary of DHS to, take
or agree or commit to take any action that would make any representation or
warranty of DHS in this Agreement inaccurate at, or as of any time prior to, the
Effective Time.
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Section 5.03 No Solicitation.
---------------
(a) From the date hereof until the earlier of the Effective Time or
the termination of this Agreement, MAI agrees that: (i) it will not, and will
use its best efforts to cause its Subsidiaries and the officers, directors,
employees, investment bankers, consultants and other agents of MAI and its
Subsidiaries and the Affiliates of MAI not to, directly or indirectly, initiate,
solicit, encourage or facilitate or take any action to initiate, solicit,
encourage or facilitate any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
stockholders) with respect to a merger, consolidation or other business
combination including MAI or any of its Subsidiaries or any acquisition or
similar transaction (including, without limitation, a tender or exchange offer)
involving the purchase of (A) all or any significant portion of the assets of
MAI and its Subsidiaries taken as a whole, (B) 20% or more of the outstanding
shares of MAI Common Stock, or (C) 20% of the outstanding shares of the capital
stock of any Subsidiary of MAI (any such proposal or offer being hereinafter
referred to as an "Alternative Proposal"), or engage in any discussions or
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any Person or group relating to an Alternative
Proposal (excluding the transactions contemplated by this Agreement) or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal; (ii) it will immediately cease and cause to be terminated and will
cause its Subsidiaries and the officers, directors, employees, investment
bankers, consultants and other agents of MAI and its Subsidiaries and the
Affiliates of MAI to immediately cease and terminate, any existing activities,
discussions or negotiations with any parties with respect to any of the
foregoing, and it will take the necessary steps to inform such parties of its
obligations under this Section 5.03(a); and (iii) it will notify DHS immediately
(and in no event later than 24 hours after receipt of any Alternative Proposal)
if any such inquiries, proposals or offers are received by, any such information
is requested from, or any such negotiations or discussions are sought to be
initiated or continued with, it or any of such Persons; provided, however, that
-------- -------
nothing contained in this Section 5.03 shall prohibit the Board of Directors of
MAI from (x) furnishing information to (but only pursuant to a confidentiality
agreement in customary form and having terms and conditions substantially
comparable to the Confidentiality Agreement) or entering into discussions or
negotiations with any Person or group that makes an unsolicited bona fide
---- ----
Alternative Proposal, if, and only to the extent that, (i) the Board of
Directors of MAI, based upon the written opinion of outside counsel, determines
in good faith that such action is required for the Board of Directors to comply
with its fiduciary duties to stockholders imposed by applicable law, (ii) prior
to furnishing such information to, or entering into discussions or negotiations
with, such Person or group, MAI provides written notice to DHS to the effect
that it is furnishing information to, or entering into discussions or
negotiations with such Person or group (without being required to identify such
Person or group), and (iii) MAI keeps DHS informed (which notice shall be
provided orally and in writing) of the status of such discussions or
negotiations (provided that MAI will not be required to inform DHS of the
substantive terms of such discussions or negotiations, other than the aggregate
consideration being offered to MAI and/or its stockholders), and (y) to the
extent required, complying with Rule 14e-2 promulgated under the 1934 Act with
regard to an Alternative Proposal. Except for DHS' termination rights pursuant
to Section 9.01, DHS will not utilize any of the information provided to it by
MAI pursuant to this Section 5.03(a) in any manner which could reasonably be
expected to undermine MAI's
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discussions or negotiations with any Person or group identified to DHS by MAI
hereunder.
(b) From the date hereof until the earlier of the Effective Time or
the termination of this Agreement, DHS agrees that: (i) it will not, and will
use its best efforts to cause its Subsidiaries and the officers, directors,
employees, investment bankers, consultants and other agents of DHS and its
Subsidiaries and Affiliates of DHS not to, directly or indirectly, initiate,
solicit, encourage or facilitate or take any action to initiate, solicit,
encourage or facilitate any inquiries or the making or implementation of any
proposal or offer with respect to any transaction such as would cause ownership
or voting control of DHS to be vested in any Person or group, or with respect to
a material acquisition in any line of business not substantially related to the
existing line of business of DHS and its Subsidiaries (a "DHS Proposal"); (ii)
it will immediately cease and cause to be terminated and will cause its
Subsidiaries and the officers, directors, employees, investment bankers,
consultants and other agents of DHS and its Subsidiaries and the Affiliates of
DHS to immediately cease and terminate, any existing activities, discussions or
negotiations with any parties with respect to any of the foregoing, and it will
take the necessary steps to inform such parties of its obligations under this
Section 5.03(b); and (iii) it will notify MAI immediately (and in no event later
than 24 hours after receipt of any proposal with respect to any such
transaction) if any inquiries, proposals, or offers are received by, or any
information is requested in respect of, any transaction of the type described in
this Section 5.03(b). DHS shall be permitted to conduct unsolicited
negotiations and discussions with respect to any such transaction, and shall be
required to report thereon to MAI, in the same manner and to the same extent as
is applicable under Section 5.03(a) with respect to any Alternative Proposal as
described therein. Except for MAI's termination rights pursuant to Section
9.01, MAI will not utilize any information provided to it by DHS pursuant to
this Section 5.03(b) in any manner which could reasonably be expected to
undermine DHS' discussions or negotiations with any Person or group identified
to MAI by DHS hereunder.
Section 5.04 Approval of Stockholders.
------------------------
(a) MAI shall, through its Board of Directors, duly call, give notice
of, convene and hold a meeting of its stockholders (the "MAI Stockholders'
Meeting") for the purpose of voting on the approval and adoption of this
Agreement and the Merger (the "MAI Stockholders' Approval") as soon as
reasonably practicable after the date hereof. Except as provided in the next
sentence, the Board of Directors of MAI shall recommend approval and adoption of
this Agreement and the Merger by the holders of MAI Common Stock and shall use
all commercially reasonable efforts to obtain such approval and adoption. The
Board of Directors of MAI shall be permitted to (i) not recommend to the holders
of MAI Common Stock that they give the MAI Stockholders' Approval, or (ii)
withdraw or modify in a manner adverse to DHS its recommendation to the holders
of MAI Common Stock that they give the MAI Stockholders' Approval, but in each
of cases (i) and (ii) only if and to the extent that a Superior Proposal is
pending at the time the MAI Board of Directors determines to take any such
action or inaction; provided, however, that no such failure to recommend,
-------- -------
withdrawal or modification shall be made unless MAI shall have delivered to DHS
a written notice (a "Notice of Superior Proposal") advising DHS that the Board
of Directors of MAI has received a Superior Proposal and identifying the Person
or group making such Superior Proposal; and further provided, that
--- ------- --------
43
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nothing contained in this Agreement shall prevent the Board of Directors of MAI
from complying with Rule 14e-2 under the 1934 Act with regard to an Alternative
Proposal. For purposes of this Agreement, "Superior Proposal" means any bona
----
fide Alternative Proposal for at least a majority of the outstanding Shares on
- ----
terms that the Board of Directors of MAI determines in its good faith judgment
(based on the advice of an independent reputable financial advisor, taking into
account all the terms and conditions of the Alternative Proposal, including any
break-up fees, expense reimbursement provisions and conditions to consummation)
are more favorable and provide greater value to all holders of MAI Common Stock
than this Agreement and the Merger taken as a whole.
(b) DHS shall, through its Board of Directors, duly call, give notice
of, convene and hold a meeting of its stockholders (the "DHS Stockholders'
Meeting" and, together with the MAI Stockholders' Meeting, the "Stockholders'
Meetings") for the purpose of voting on (i) the issuance of DHS Common Stock in
the Merger (the "DHS Stockholders' Approval"), and (ii) the name change of DHS
described in Section 5.02(a) (the "Name Change") as soon as reasonably
practicable after the date hereof. The Board of Directors of DHS shall
recommend that the stockholders of DHS approve such issuances of DHS Common
Stock, and the Name Change, and shall use its best efforts to obtain such
approval.
(c) DHS and MAI shall coordinate and cooperate with respect to the
timing of the Stockholders' Meetings and shall use their best efforts to cause
the Stockholders' Meetings to be held on the same day and as soon as practicable
after the date hereof.
Section 5.05 Preparation of Form S-4 and Proxy Statement.
-------------------------------------------
(a) MAI and DHS shall prepare and file with the SEC as soon as
reasonably practicable after the date hereof, the Proxy Statement, and DHS shall
prepare and file with the SEC as soon as reasonably practicable after such date,
a registration statement on Form S-4 with respect to the DHS Common Stock
issuable in the Merger, and in which the Proxy Statement will be included within
the prospectus. DHS and MAI shall use all reasonable efforts to have the Form
S-4 declared effective by the SEC as promptly as practicable after such filing.
Prior to the Effective Date, DHS shall also take any action (other than
qualifying as a foreign corporation or taking any action which would subject it
to service of process in any jurisdiction where DHS is not now so qualified or
subject) required to be taken under applicable state blue sky or securities laws
in connection with the issuance of DHS Common Stock in connection with the
Merger and will pay all expenses incident thereto. If at any time prior to the
Effective Time any event shall occur that should be set forth in an amendment of
or a supplement to the Form S-4, DHS shall prepare and file with the SEC such
amendment or supplement as soon thereafter as is reasonably practicable. DHS,
Merger Subsidiary and MAI shall cooperate with each other in the preparation of
the Form S-4 and the Proxy Statement and any amendment or supplement thereto,
and each shall notify the other of the receipt of any comments of the SEC with
respect to the Form S-4 and any amendment or supplement thereto or for
additional information, and shall provide to the other promptly copies of all
correspondence between DHS or MAI, as the case may be, and the SEC with respect
to the Form S-4 or the Proxy Statement. DHS shall give MAI and its counsel the
opportunity to review and comment on the Form S-4 and all responses to requests
for
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additional information by and replies to comments of the SEC before their being
filed with, or sent to, the SEC. Each of MAI, DHS, and Merger Subsidiary agrees
to use its best efforts, after consultation with the other parties hereto, to
respond promptly to all such comments of and requests by the SEC and to cause
(i) the Form S-4 to be declared effective by the SEC at the earliest practicable
time and to be kept effective as long as is necessary to consummate the Merger,
and (ii) the Proxy Statement to be mailed to the holders of DHS Common Stock and
MAI Common Stock entitled to vote at the meetings of the stockholders of DHS and
MAI at the earliest practicable time.
(b) DHS agrees that the Form S-4, when declared effective by the SEC,
will not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that the foregoing shall not apply to the extent
-------- -------
that any such untrue statement of a material fact or omission to state a
material fact was made by DHS in reliance upon and in conformity with written
information concerning MAI or any of its Affiliates furnished to DHS by MAI or
any of its Affiliates. MAI agrees that the information provided by it for
inclusion in the Proxy Statement, when the Proxy Statement is mailed to
stockholders, will not include any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. No amendment or supplement to the Form S-4 will be made by DHS
until it has consulted with MAI and its counsel. DHS will advise MAI, promptly
after it receives notice thereof, of the time when the Form S-4 has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order, or the suspension of the qualification of DHS Common Stock issuable
in connection with the Merger for offering or sale in any jurisdiction or any
request by the SEC for amendment of the Proxy Statement or the Form S-4 or
comments thereon and responses thereto or requests for additional information.
Section 5.06 Access to Information.
---------------------
(a) To the extent permitted by applicable law, from the date hereof
until the Effective Time, MAI will give DHS, its counsel, financial advisors,
auditors and other authorized representatives reasonable access during normal
business hours to the offices, properties, books and records of MAI and its
Subsidiaries, will furnish to DHS, its counsel, financial advisors, auditors and
other authorized representatives such financial and operating data and other
information as such Persons may reasonably request and will instruct MAI's
employees, auditors, counsel and financial advisors to cooperate with DHS in its
investigation of the business of MAI and its Subsidiaries; provided, however,
-------- -------
that no investigation pursuant to this Section 5.06(a) shall affect any
representation or warranty made by MAI to DHS hereunder. The foregoing
information shall be held in confidence to the extent required by, and in
accordance with, the provisions of the confidentiality agreement between DHS and
MAI (the "Confidentiality Agreement").
(b) To the extent permitted by applicable law, from the date hereof
until the Effective Time, DHS will give MAI, its counsel, financial advisors,
auditors and other authorized
45
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representatives reasonable access during normal business hours to the offices,
properties, books and records of DHS and its Subsidiaries, will furnish to MAI,
its counsel, financial advisors, auditors and other authorized representatives
such financial and operating data and other information as such Persons may
reasonably request and will instruct DHS' employees, auditors, counsel and
financial advisors to cooperate with MAI in its investigation of the business of
DHS and its Subsidiaries; provided, however, that no investigation pursuant to
-------- -------
this Section 5.06(b) shall affect any representation or warranty made by DHS to
MAI hereunder. Such information shall be held in confidence to the extent
required by, and in accordance with, the Confidentiality Agreement.
Section 5.07 Notices of Certain Events.
-------------------------
(a) MAI and DHS shall promptly notify each other of:
(i) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection with the
transactions contemplated by this Agreement; and
(ii) any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this
Agreement.
(b) MAI shall promptly notify DHS of any actions, suits, claims,
investigations or proceedings commenced or, to its knowledge, threatened
against, relating to or involving or otherwise affecting MAI or any Subsidiary
of MAI which, if pending on the date of this Agreement, would have been required
to have been disclosed pursuant to Section 3.12 or Section 3.17 or which relate
to the consummation of the transactions contemplated by this Agreement.
(c) DHS shall promptly notify MAI of any actions, suits, claims,
investigations or proceedings commenced or, to its knowledge, threatened
against, relating to or involving or otherwise affecting DHS or any Subsidiary
of DHS which, if pending on the date of this Agreement, would have been required
to have been disclosed pursuant to Section 4.12 or Section 4.17 or which relate
to the consummation of the transactions contemplated by this Agreement.
Section 5.08 Regulatory and Other Approvals. Subject to the terms and
------------------------------
conditions of this Agreement, each of MAI and DHS will proceed diligently and in
good faith to, as promptly as practicable, (a) obtain all consents, approvals or
actions of, make all filings with and give all notices to Governmental
Authorities or any other public or private third parties required of DHS, MAI or
any of their Subsidiaries to consummate the Merger and the other transactions
contemplated hereby, and (b) provide such other information and communications
to such Governmental Authorities or other public or private third parties as the
other party or such Governmental Authorities or other public or private third
parties may reasonably request in connection therewith. In addition to and not
in limitation of the foregoing, each of the parties will (i) take promptly all
actions necessary to make any filings (if any) legally required of DHS and MAI
or their respective Affiliates under the HSR Act as soon as practicable but in
no event
46
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later than thirty (30) days after the date hereof, (ii) comply at the earliest
practicable date with any request for additional information received by such
party or its Affiliates from the Federal Trade Commission (the "FTC") or the
Antitrust Division of the Department of Justice (the "Antitrust Division")
pursuant to the HSR Act, and (iii) cooperate with the other party in connection
with such party's filings (if any) under the HSR Act and in connection with
resolving any investigation or other inquiry concerning the Merger or the other
transactions contemplated by this Agreement commenced by either the FTC or the
Antitrust Division or state attorneys general. Without limiting the generality
of the foregoing, DHS and MAI shall together, or pursuant to an allocation of
responsibility to be agreed between them, coordinate and cooperate in
determining whether any action by or in respect of, or filing with, any
Governmental Authorities is required, or any actions, consents, approvals or
waivers are required to be obtained from parties to any contracts, in connection
with the consummation of the transactions contemplated by this Agreement, and in
seeking any such actions, consents, approvals or waivers or making any such
filings, furnishing information required in connection therewith and seeking
timely to obtain any such actions, consents, approvals or waivers.
Section 5.09 Public Announcements. So long as this Agreement is in
--------------------
effect, DHS and MAI will consult with each other before issuing any press
release or making any SEC filing or other public statement with respect to this
Agreement or the Voting Agreement or the transactions contemplated hereby or
thereby and, except as may be required by applicable law, court process or any
listing agreement with any national securities exchange or with NASDAQ, will not
issue any such press release or make any such SEC filing or other public
statement prior to such consultation and providing the other party with a
reasonable opportunity to comment thereon and approve the same (such approval
not to be unreasonably withheld or delayed). Simultaneously with the
announcement regarding the execution and delivery of this Agreement, DHS shall
announce its fourth quarter 1998 earnings results and its change in contract
accounting methods and its proposed write-offs for impairment of goodwill and
other assets, which announcement shall be substantially in the form of Schedule
5.09 to the DHS Disclosure Letter.
Section 5.10 Further Assurances. At and after the Effective Time, the
------------------
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of MAI or Merger Subsidiary, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of MAI or Merger Subsidiary, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets of MAI acquired or to be acquired by the Surviving Corporation as a
result of, or in connection with, the Merger.
Section 5.11 MAI Affiliates. At least thirty (30) days prior to the
--------------
Effective Time, MAI shall deliver a letter to DHS identifying all persons who,
at the time of the MAI Stockholders' Meeting, may, in MAI's reasonable judgment,
be deemed to be "affiliates" (as such term is used in Rule 145 under the 1933
Act) of MAI ("MAI Affiliates"). MAI shall use its reasonable efforts to cause
each MAI Affiliate to deliver to DHS at or prior to the Effective Time a letter
substantially in the form and to the effect of Exhibit B hereto (an "Affiliate
---------
Letter"). DHS shall be entitled to issue appropriate stop transfer instructions
to the transfer agent for the DHS Common Stock to be issued to MAI Affiliates
pursuant to the Merger, consistent with the terms
47
<PAGE>
of such Affiliate Letters. At the Closing, unless the shares of DHS Common Stock
issuable to the MAI Affiliates are included for resale in the Form S-4
registration statement contemplated by Section 5.05 and are freely tradeable
upon the effectiveness of such Form S-4, DHS and the MAI Affiliates will enter
into a Registration Rights Agreement in substantially the form attached hereto
as Exhibit C; and, in the event that the shares of DHS Common Stock issuable to
---------
the MAI Affiliates are included for resale in the Form S-4 and are freely
tradeable upon the effectiveness of such Form S-4, DHS shall file such
amendments to such Form S-4 as may be required to keep such registration
statement and the resale prospectus therein current and effective for a period
of two years following the effective date thereof (or, if sooner, until such
date as all such DHS Common Stock has been disposed of by the MAI Affiliates).
Section 5.12 Obligations of Merger Subsidiary. DHS will take all action
--------------------------------
necessary to cause Merger Subsidiary to perform its obligations under this
Agreement and to consummate the Merger on the terms and conditions set forth in
this Agreement.
Section 5.13 Listing of Stock. DHS shall use its best efforts to cause
----------------
the shares of DHS Common Stock to be issued in connection with the Merger to be
approved for listing on the NASDAQ National Market System at or prior to the
Effective Time, subject to official notice of issuance.
Section 5.14 Antitakeover Statutes. If any Takeover Statute is or may
---------------------
become applicable to the Merger, each of DHS and MAI shall take such actions as
are necessary so that the transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated hereby and
otherwise act to eliminate or minimize the effects of any Takeover Statute on
the Merger.
Section 5.15 Tax Treatment. Each of DHS and MAI shall not take any
-------------
action and shall not fail to take any action which action or failure to act
would cause, or would be reasonably likely to cause, DHS, MAI or their
respective stockholders to recognize gain or loss for federal income tax
purposes (other than in respect of any cash paid in lieu of fractional shares)
as a result of the issuance of DHS Common Stock in the Merger, and MAI shall use
its reasonable efforts to obtain the opinion of counsel referred to in Section
8.07.
Section 5.16 Appointment of Directors. Immediately following the
------------------------
Closing, DHS shall cause Paul Herchman, Tom Montgomery and Jim Silcock to become
members of the Board of Directors of DHS immediately following the Effective
Time, and shall increase the size of the Board of Directors of DHS to seven (7)
members consisting of the aforesaid three (3) persons, and Brad A. Hummel, Max
W. Batzer and two independent directors selected by the existing Board of
Directors of DHS. To the extent that any of such individuals is not already
designated within a class of directors of DHS, such individuals shall be
allocated as nearly equally as possible among the three classes of DHS
directors. DHS covenants that any existing directors of DHS who do not continue
as directors from and after the Closing will resign at the time of Closing so as
to avoid any optional reductions of exercise price under outstanding DHS
Options. If, from and after the Effective Time, any director shall die, resign
or agree not to be nominated
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for reelection to the Board of Directors of DHS, then DHS shall invite Gary Hill
to become a member of the Board of Directors of DHS to fill the vacancy thereby
created.
Section 5.17 Director and Officer Indemnification. DHS agrees that all
------------------------------------
rights to indemnification and advancement of expenses existing in favor of the
current and former directors and officers of MAI (the "Indemnified Persons")
under the provisions existing on the date hereof of the articles of
incorporation and by-laws of MAI shall survive the Effective Time for six (6)
years thereafter, and DHS agrees to indemnify and advance expenses to the
Indemnified Persons to the same extent as would be required or permitted by MAI
under the provisions existing on the date hereof of the articles of
incorporation, by-laws and indemnification agreements of MAI. Until the sixth
(6th) anniversary of the Effective Time, DHS shall cause the Surviving
Corporation to maintain in effect with respect to matters occurring prior to the
Effective Time, to the extent available, the policies of directors' and
officers' liability insurance currently maintained by MAI (or may cause similar
coverage to be included in DHS' directors' and officers' liability coverage).
Section 5.18 Employee Benefits.
-----------------
(a) DHS hereby agrees to cause the Surviving Corporation to (i) pay,
in accordance with their terms as in effect on the date hereof, all amounts due
and payable under the terms of all written employment, severance and termination
contracts, agreements, plans, policies and commitments of MAI and its
Subsidiaries with or with respect to its current or former employees, officers
and directors as set forth in the MAI Disclosure Letter to the extent vested on
or prior to the date of this Agreement or which become vested as a result of the
transactions contemplated hereby, and (ii) assume and continue to honor the
terms of such agreements and commitments.
(b) DHS hereby acknowledges that the consummation of the Merger will
constitute a "friendly" change of control of MAI (to the extent relevant) for
all benefit plans, employee agreements, stock option plans and other
compensation arrangements of MAI.
Section 5.19 Good Faith Efforts. Each party will use its good faith
------------------
efforts to satisfy or cause to be satisfied the conditions precedent to the
parties' performance hereunder as set forth in Articles VI, VII and VIII,
subject to applicable legal requirements and limitations.
ARTICLE VI
GENERAL CONDITIONS PRECEDENT TO THE MERGER
The obligations of MAI, DHS and Merger Subsidiary to consummate the Merger
pursuant to this Agreement and the other transactions required to be consummated
by such date by this Agreement are subject to the satisfaction (or waiver by the
party for whose benefit the applicable condition exists) of each of the
following conditions:
Section 6.01 Stockholder Approval. This Agreement and the transactions
--------------------
contemplated hereby shall have been approved and adopted by the stockholders of
MAI in accordance with Texas Law. The stockholders of DHS shall have approved
the issuance of DHS Common Stock
49
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in the Merger by the requisite vote under applicable law and under the
applicable rules of the NASDAQ National Market System, as the case may be.
Approval of the Name Change shall not constitute a condition precedent
---
hereunder.
Section 6.02 HSR Act. Any applicable waiting period under the HSR Act
-------
relating to the transactions contemplated by this Agreement shall have expired
or been terminated.
Section 6.03 Registration Statements; State Securities Laws. The Form
----------------------------------------------
S-4 shall have become effective in accordance with the provisions of the 1933
Act, and no stop order suspending such effectiveness shall have been issued and
remain in effect and no proceeding seeking such an order shall be pending or
threatened. DHS shall have received all state securities or blue sky permits
and other authorizations necessary to issue the DHS Common Stock pursuant to
this Agreement.
Section 6.04 Listing. The shares of DHS Common Stock to be issued in
-------
the Merger shall have been approved for listing on the NASDAQ National Market
System, subject to official notice of issuance.
Section 6.05 Suits or Other Proceedings. There shall not be pending or
--------------------------
threatened in writing (on any basis which DHS or MAI may reasonably deem
credible and not of mere nuisance value) any suit, action or proceeding by any
Governmental Authority or other Person, (a) seeking to restrain or prohibit the
consummation of the Merger or any of the other transactions contemplated by this
Agreement, or seeking to obtain from DHS or MAI any damages the amount of which
would be reasonably likely to have a Material Adverse Effect on MAI or DHS, or
(b) seeking to prohibit or limit the ownership or operation by DHS, MAI or any
of their respective Subsidiaries of, or to compel DHS, MAI or any of their
respective Subsidiaries to dispose of or hold separate, any material portion of
the business or assets of DHS, MAI or any of their respective Subsidiaries, as a
result of the Merger or any of the other transactions contemplated by this
Agreement.
Section 6.06 Employment Agreements. DHS shall have assumed the current
---------------------
employment agreement between MAI and Gary Hill, or entered into a new employment
agreement with Gary Hill on terms and conditions mutually agreeable to DHS and
Gary Hill.
Section 6.07 Pooling Letters. To the extent required by either of the
---------------
investment bankers rendering the fairness opinions contemplated by Sections 7.07
and 8.08 in order to confirm, or avert the withdrawal of, such fairness
opinions, MAI's independent public accountants shall have delivered to DHS and
MAI an opinion letter confirming that MAI is an entity which does not preclude
the Merger from being treated as a pooling of interests for accounting purposes,
and DHS' independent public accountants shall have delivered to DHS and MAI an
opinion letter confirming that the Merger will qualify for a pooling of interest
accounting treatment; and if requested by either of such investment bankers,
such opinion letters shall be confirmed on and as of the date of mailing of the
Proxy Statement to stockholders.
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ARTICLE VII
CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF DHS AND MERGER SUBSIDIARY
The obligations of DHS and Merger Subsidiary to consummate the Merger
pursuant to this Agreement and the other transactions required to be consummated
by such date by this Agreement are further subject to the satisfaction, at or
prior to the Effective Time, of each of the following conditions (all or any of
which may be waived in whole or in part by DHS and Merger Subsidiary in their
sole discretion):
Section 7.01 Representations and Warranties. The representations and
------------------------------
warranties made by MAI in this Agreement shall be true and correct in all
material respects correct as of the Closing Date as though made on and as of the
Closing Date or, in the case of representations and warranties made as of a
specified date earlier than the Closing Date, on and as of such earlier date,
and MAI shall have delivered to DHS a certificate, dated the Closing Date and
executed by its President to such effect.
Section 7.02 Performance of Obligations. MAI shall have performed and
--------------------------
complied with each agreement, covenant and obligation required by this Agreement
to be so performed or complied with by MAI at or prior to the Closing, and MAI
shall have delivered to DHS a certificate, dated the Closing Date and executed
by its President to such effect.
Section 7.03 No Material Adverse Change. Except as otherwise disclosed
--------------------------
in this Agreement or the MAI Disclosure Letter, there shall not have been any
change in the consolidated business, results of operations, financial condition
or prospects of MAI and its Subsidiaries, taken as a whole, between September
30, 1998 and the Closing Date which would have a Material Adverse Effect on MAI.
Section 7.04 Consents. DHS shall have received consents or waivers from
--------
such Persons as are necessary for DHS to consummate the transactions
contemplated by this Agreement, and from the holder(s) of the MAI Warrants with
respect to the adjustments pursuant to Section 1.05. In connection with the
foregoing, if and to the extent required by any of DHS' lenders, MAI shall have
caused Thomas Montgomery and/or his Affiliates to provide to Chase Bank of
Texas, National Association, a replacement undertaking for the agreement of MAI
described in Item 1 of Schedule 3.05 to the MAI Disclosure Letter.
Section 7.05 Opinion of MAI Counsel. At the Closing, DHS shall have
----------------------
received from Jackson Walker L.L.P., counsel to MAI, a written opinion
reasonably satisfactory to DHS, dated as of the Closing Date, substantially to
the effect as set forth in Exhibit D hereto.
---------
Section 7.06 Proceedings. All proceedings to be taken on the part of
-----------
MAI in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to DHS, and DHS shall have received copies of all such documents and
other evidences as DHS may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
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Section 7.07 Fairness Opinion. DHS shall have received a written
----------------
opinion of Prudential Securities Incorporated, dated as of a date reasonably
prior to the date of mailing of the Proxy Statement to DHS' stockholders, to the
effect that the exchange ratio set forth in Section 1.02(a)(iii) is fair to DHS
from a financial point of view, such fairness opinion to be in form and
substance reasonably acceptable to DHS and its Board of Directors; and, at the
date of such mailing of the Proxy Statement, no event or circumstance shall
exist such as has caused Prudential Securities Incorporated to withdraw or
materially adversely modify such fairness opinion.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MAI
The obligations of MAI to consummate the Merger pursuant to this
Agreement and the other transactions required to be consummated by such date by
this Agreement are further subject to the satisfaction, at or prior to the
Effective Time, of each of the following conditions (all or any of which may be
waived in whole or in part by MAI in its sole discretion):
Section 8.01 Representations and Warranties. The representations and
------------------------------
warranties made by DHS and Merger Subsidiary in this Agreement shall be true and
correct in all material respects as of the Closing Date as though made on and as
of the Closing Date or, in the case of representations and warranties made as of
a specified date earlier than the Closing Date, on and as of such earlier date,
and DHS and Merger Subsidiary shall each have delivered to MAI a certificate,
dated the Closing Date and executed by DHS' President and by Merger Subsidiary's
President to such effect.
Section 8.02 Performance of Obligations. DHS and Merger Subsidiary
--------------------------
shall each have performed and complied with each agreement, covenant and
obligation required by this Agreement to be so performed or complied with by DHS
or Merger Subsidiary at or prior to Closing, and DHS and Merger Subsidiary shall
each have delivered to MAI a certificate, dated the Closing Date and executed by
DHS' President and by Merger Subsidiary's President to such effect.
Section 8.03 No Material Adverse Change. Except as otherwise disclosed
--------------------------
in this Agreement or the DHS Disclosure Letter, there shall not have been any
change in the consolidated business, results of operations, financial condition
or prospects of DHS and its Subsidiaries, taken as a whole, between September
30, 1998 and the Closing Date which would have a Material Adverse Effect on DHS.
Section 8.04 Consents. MAI shall have received consents or waivers from
--------
such Persons as are necessary for MAI to consummate the transactions
contemplated by this Agreement.
Section 8.05 Opinion of DHS Counsel. At the Closing, MAI shall have
----------------------
received from Greenberg Traurig, counsel to DHS, a written opinion reasonably
satisfactory to MAI, dated as of the Closing Date, substantially to the effect
as set forth in Exhibit E hereto.
---------
52
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Section 8.06 Proceedings. All proceedings to be taken on the part of
-----------
DHS in connection with the transactions contemplated by this Agreement and all
documents incident thereto shall be reasonably satisfactory in form and
substance to MAI, and MAI shall have received copies of all such documents and
other evidences as MAI may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
Section 8.07 Tax Opinion. MAI shall have received an opinion of Jackson
-----------
Walker L.L.P., in form and substance reasonably satisfactory to MAI, on the
basis of certain facts, representations and assumptions set forth in such
opinion which are consistent with the state of facts existing at the Effective
Time, to the effect that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
and that neither MAI nor any of its stockholders shall recognize gain or loss
for U.S. federal income tax purposes as a result of the Merger (other than in
respect of any cash paid in lieu of fractional shares). In rendering the
opinions described in the preceding sentence, such counsel may rely upon the
opinions described in Sections 7.07 and 8.08 and may require and rely upon
representations contained in this Agreement and in certificates of officers and
principal stockholders of MAI, DHS and their respective Subsidiaries.
Section 8.08 Fairness Opinion at or prior to the Closing. MAI shall
-------------------------------------------
have received a written opinion of Needham & Company, Inc., dated as of a date
reasonably prior to the date of mailing of the Proxy Statement to MAI's
stockholders, to the effect that the Merger Consideration to be received by the
holders of Shares in the Merger is fair to MAI from a financial point of view,
such fairness opinion to be in form and substance reasonably acceptable to MAI
and its Board of Directors; and, at the date of such mailing of the Proxy
Statement, no event or circumstance shall exist such as has caused Needham &
Company, Inc. to withdraw or materially adversely modify such fairness opinion.
Section 8.09 Accounting Matters. There shall not be pending any
------------------
unresolved dispute or objection by the SEC with respect to the implementation of
the accounting changes and write-offs described in the last sentence of Section
5.09; and to the extent that the SEC shall have requested any material
modification to such changes or write-offs, such changes or modifications shall
be reasonably satisfactory to MAI.
Section 8.10 DHS First Quarter Results. The results of operations of
-------------------------
DHS and its Subsidiaries for the quarter ending March 31, 1999 shall not, taken
as a whole, be materially adversely different than the most recent projections
of such results of operations provided by DHS to MAI.
Section 8.11 Waivers from Lenders. DHS shall have received from Chase
--------------------
Bank of Texas, National Association ("Chase") and The Prudential Insurance
Company of America ("Prudential") the consents of such lenders to, or waivers by
such lenders of any defaults with respect to, (a) the charges and write-offs
taken by DHS pertaining to the change in contract accounting and write-offs for
impairment of goodwill and other assets (as described in Section 5.09), and (b)
charges (to the extent identifiable and quantifiable) resulting from the
53
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consummation of the Merger, such consents or waivers to be in form and substance
reasonably satisfactory to MAI.
ARTICLE IX
TERMINATION
Section 9.01 Termination. This Agreement may be terminated and the
-----------
transactions contemplated hereby may be abandoned at any time prior to the
Effective Time whether prior to or after Stockholders' Approval:
(a) By mutual written agreement of MAI and DHS duly authorized by
action taken by or on behalf of their respective Boards of Directors;
(b) By either MAI or DHS upon notification to the non-terminating
party by the terminating party;
(i) at any time after May 31, 1999 if the Merger shall not have been
consummated on or prior to such date and such failure to consummate the
Merger is not caused by or substantially attributable to a breach of this
Agreement by the terminating party;
(ii) if (A) MAI Stockholders' Approval (under Texas Law), or (B) DHS
Stockholders' Approval (under Delaware Law and under the applicable
regulations of NASDAQ National Market System), as the case may be, shall
not be obtained by reason of the failure to obtain the requisite vote upon
a vote held at a meeting of stockholders, or any adjournment thereof,
called therefor;
(iii) if (A) there has been a material breach of any representation,
warranty, covenant or agreement on the part of the non-terminating party
set forth in this Agreement, which breach is not curable or, if curable,
has not been cured within thirty (30) days following receipt by the non-
terminating party of notice of such breach from the terminating party (or,
if sooner and the terminating party has not delayed giving notice of such
breach, May 31, 1999), or (B) any condition precedent to the terminating
party's obligations set forth in Article VII, with respect to DHS, or
Article VIII, with respect to MAI, of this Agreement has not been met or
waived by such party by May 31, 1999; or
(iv) if any court of competent jurisdiction or other competent
Governmental Authority shall have issued an order making illegal or otherwise
restricting, preventing or prohibiting the Merger and such order shall have
become final and nonappealable;
(c) By MAI if: (i) the Board of Directors of MAI determines in good
faith to accept a Superior Proposal; or (ii) the Board of Directors of DHS shall
have withdrawn or modified in a manner materially adverse to MAI its approval or
recommendation of this Agreement or the Merger;
54
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(d) By DHS if the Board of Directors of MAI (i) shall have withdrawn
or modified in a manner materially adverse to DHS its approval or recommendation
of this Agreement or the Merger, or (ii) shall have recommended a Superior
Proposal to the stockholders of MAI or shall have entered into a definitive
agreement providing for a Superior Proposal with a Person other than DHS; or
(e) By MAI if DHS is engaged in ongoing active negotiations for, or
has accepted and there remains in effect, a DHS Proposal.
Section 9.02 Effect of Termination.
---------------------
(a) If this Agreement is validly terminated by either MAI or DHS
pursuant to Section 9.01, this Agreement will forthwith become null and void and
there will be no liability or obligation on the part of either MAI or DHS (or
any of their respective representatives or Affiliates), except that (i) the
provisions of Sections 10.05 and 10.08, this Section 9.02 and the
Confidentiality Agreement will continue to apply following any such termination,
and (ii) nothing contained herein shall relieve any party hereto from liability
for willful breach of its representations, warranties, covenants or agreements
contained in this Agreement.
(b) (i) If this Agreement is terminated by (A) MAI pursuant to
Section 9.01(c)(i), or (B) by DHS pursuant to Section 9.01(d)(i) (unless any of
the conditions precedent set forth in Articles VI and/or VIII above (other than
Sections 6.01, 8.05, 8.07 or 8.08, or Section 8.04 to the extent that any
consent is contingent only upon stockholder approval or the Closing, or Section
8.06 to the extent that the DHS Stockholders' Meeting is held subsequent to the
MAI Stockholders' Meeting) shall not have been satisfied, after due notice and
opportunity to cure, at the time of the MAI Stockholders' Meeting held to
consider approval of the transactions contemplated herein) or Section
9.01(d)(ii), then MAI shall pay or cause to be paid to DHS, by wire transfer of
same day funds on the day of such termination, a termination fee of $1,000,000.
(ii) If this Agreement is terminated by MAI pursuant to Section
9.01(e), then DHS shall pay or cause to be paid to MAI, by wire transfer of
same day funds on the day of such termination, a termination fee of
$1,000,000.
(iii) In the event that either DHS or MAI shall fail or refuse to
consummate the transactions contemplated by this Agreement for no reason,
or for any reason which would not give such party the right to terminate
this Agreement in accordance with this Article IX, then the party which is
prepared to consummate the transactions hereunder may, so long as it is not
in material breach of any representation, warranty, covenant or agreement
on its part hereunder, terminate this Agreement by written notice to the
non-performing party, whereupon the non-performing party shall pay or cause
to be paid to the terminating party, by wire transfer of same day funds on
the day of such termination, a termination fee of $375,000; and the payment
of such termination fee shall relieve the party making payment from any
liability under Section 9.02(a)(ii) above.
(c) The parties acknowledge that the agreements contained in this
Section 9.02 are an integral part of the transactions contemplated by this
Agreement, and that, without
55
<PAGE>
these agreements, the parties hereto would not enter into this Agreement;
accordingly, if either party fails promptly to pay any amount due pursuant to
this Section 9.02, and in order to obtain such payment, either party commences a
suit which results in a judgment against the non-paying party for any fee or
expense reimbursement set forth in this Section 9.02, the non-paying party shall
pay to the other party its costs and expenses (including reasonable attorneys'
fees and expenses) in connection with such suit, together with interest on the
amount of the fee at the publicly announced prime rate of Citibank, N.A. in
effect on the date such payment was required to be made.
ARTICLE X
MISCELLANEOUS
Section 10.01 Notices. All notices, requests and other communications
-------
to any party hereunder shall be in writing and will be deemed to have been duly
given only if delivered personally or by facsimile transmission or mailed (first
class mail postage prepaid), or by overnight express courier (charges prepaid or
billed to the account of the sender) to the parties at the following addresses
or facsimile numbers:
If to DHS or Merger Subsidiary, to:
Diagnostic Health Services, Inc.
2777 Stemmons Freeway, Suite 1525
Dallas, Texas 75207
Fax: (214) 631-8537
Attention: Brad A. Hummel
with a copy to:
Greenberg Traurig
200 Park Avenue
New York, New York 10166
Fax: (212) 801-6400
Attention: Shahe Sinanian, Esq.
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If to MAI, to:
Medical Alliance, Inc.
2445 Gateway Drive, Suite 150
Irving, Texas 75063
Fax: (214) 756-6005
Attention: Paul Herchman
with a copy to:
Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202
Fax: (214) 953-5822
Attention: Richard F. Dahlson, Esq.
or such other address or facsimile number as such party may hereafter specify
for the purpose by notice to the other parties hereto. Each such notice,
request or other communication shall be effective (a) if delivered personally,
upon delivery, (b) if given by facsimile, when such facsimile is transmitted to
the facsimile number specified in this Section 10.01 and the appropriate
facsimile confirmation is received, (c) if given by mail in the manner described
above, on the third business day after mailing, or (d) if delivered by overnight
express courier, on the next business day.
Section 10.02 Entire Agreement Non-Survival of Representations and
----------------------------------------------------
Warranties: Third Party Beneficiaries.
- -------------------------------------
(a) This Agreement (including any exhibits hereto), the other
agreements referred to in this Agreement and the Confidentiality Agreement
constitute the entire agreement among the parties with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings and
negotiations, both written and oral, between the parties with respect to such
subject matter. None of this Agreement, the Confidentiality Agreement or any
other agreement contemplated hereby or thereby (or any provision hereof or
thereof) is intended to confer on any Person other than the parties hereto or
thereto any rights or remedies (except that Article I is intended to confer
rights and remedies on the Persons specified therein).
(b) The MAI Disclosure Letter, the DHS Disclosure Letter and any
Exhibits attached to this Agreement and referred to herein are hereby
incorporated herein and made a part hereof for all purposes as if fully set
forth herein.
(c) The representations and warranties contained herein or in any
schedule, instrument or other writing delivered pursuant hereto shall not
---
survive the Effective Time.
Section 10.03 Amendment. This Agreement may be amended, supplemented or
---------
modified by action taken by or on behalf of the respective Boards of Directors
of the parties hereto at any time prior to the Effective Time, whether prior to
or after the Stockholders'
57
<PAGE>
Approvals shall have been obtained, but after such adoption and approval only to
the extent permitted by applicable law. No such amendment, supplement or
modification shall be effective unless set forth in a written instrument duly
executed by or on behalf of each party hereto.
Section 10.04 Waiver. At any time prior to the Effective Time, any
------
party hereto may, to the extent permitted by applicable law (i) extend the time
for the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties of the
other parties hereto contained herein or in any document delivered pursuant
hereto, or (iii) waive compliance with any of the covenants, agreements or
conditions of the other parties hereto contained herein. No such extension or
waiver shall be effective unless set forth in a written instrument duly executed
by or on behalf of the party extending the time of performance or waiving any
such inaccuracy or non-compliance. No waiver by any party of any term or
condition of this Agreement, in any one or more instances, shall be deemed to be
or construed as a waiver of the same or any other term or condition of this
Agreement on any fixture occasion.
Section 10.05 Expenses. Except as otherwise specified in Section 9.02
--------
or agreed in writing by the parties, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated by this
Agreement, whether or not the Merger is consummated, shall be paid by the party
incurring such cost or expense.
Section 10.06 Successors and Assigns. The provisions of this Agreement
----------------------
shall be binding upon, inure to the benefit of and be enforceable by the parties
hereto and their respective successors and assigns; provided, however, that no
-------- -------
party may assign, delegate or otherwise transfer any of its rights or
obligations under this Agreement without the written consent of the other
parties hereto except that Merger Subsidiary may (subject to Section 5.15)
assign, in its sole discretion, any or all of its rights, interests and
obligations hereunder to any direct or indirect wholly-owned Subsidiary of DHS,
it being understood that no such assignment shall relieve Merger Subsidiary from
any of its obligations hereunder.
Section 10.07 Governing Law. This Agreement shall be construed in
-------------
accordance with and governed by the laws of the State of Texas (without regard
to principles of conflict of laws).
Section 10.08 Jurisdiction. Any suit, action or proceeding seeking to
------------
enforce any provision of, or based on any matter arising out of or in connection
with, this Agreement or the transactions contemplated by this Agreement may be
brought against any of the parties in any state or federal court sitting in
Dallas County, Texas, and each of the parties hereto hereby consents to the
exclusive jurisdiction of such courts (and of the appropriate appellate courts
therefrom) in any such suit, action or proceeding and waives any objection to
venue laid therein. Each party hereto agrees that service of process upon such
party at the address referred to in Section 10.01, together with written notice
of such service to such party, shall be deemed effective service of process upon
such party.
Section 10.09 Counterparts: Effectiveness. This Agreement may be signed
---------------------------
in any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become
58
<PAGE>
effective when each party hereto shall have received counterparts hereof signed
by all of the other parties hereto.
Section 10.10 Interpretation. When a reference is made in this Agreement
--------------
to a Section or Schedule, such reference shall be to a Section of this Agreement
or a Schedule to the subject Disclosure Letter unless otherwise indicated. The
table of contents and headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement they shall be deemed to be followed by the words "without
limitation." The phrases "the date of this Agreement," "the date hereof," and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to February 18, 1999.
Section 10.11 Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against public policy, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated. Upon such determination that any term, provision, covenant or
restriction of this Agreement is invalid, void, unenforceable or against public
policy, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the extent possible.
Section 10.12 Specific Performance. The parties hereto agree that
--------------------
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions of this Agreement, in
addition to any other remedy to which they are entitled at law or in equity.
Section 10.13 Performance by Merger Subsidiary. DHS shall cause Merger
--------------------------------
Subsidiary to perform each of Merger Subsidiary's duties and obligations under
this Agreement.
59
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the date first
set forth above.
DIAGNOSTIC HEALTH SERVICES, INC.
By:
------------------------------
Name: Brad A. Hummel
Title: President
MAI ACQUISITION CORP.
By:
------------------------------
Name: Brad A. Hummel
Title: President
MEDICAL ALLIANCE, INC.
By:
------------------------------
Name: Paul Herchman
Title: Chief Executive Officer
60
<PAGE>
EXHIBIT 11.1
DIAGNOSTIC HEALTH SERVICES, INC. & SUBSIDIARIES
Earnings Per Share
For the Twelve Months Ended December 31, 1998
<TABLE>
<CAPTION>
Total Issued Basic Diluted
Date # Shares Wtd. Avg. Wtd. Avg.
---------------------------------------------------------
<S> <C> <C> <C> <C>
Shares issued January 1, 1998 1/1/98 10,718,867 10,718,867
Treasury Shares 1/1/98 (233,259) (233,259)
Shares issued 1/1/98 - 12/31/98 Various 995,028 751,129
- ------------------------------------------------------------------------------------------------------------------------------------
Basic weighted average shares 12/31/98 11,480,636 11,236,737 11,236,737
===========================
Diluted:
- -------
Common stock equivalents (scheduled below) (173,540)
Convertible Preferred Common Stock Equivalents - Excluded due to anti-dilution 0
------------
(173,540)
------------
Diluted weighted average shares 11,063,197
============
Net Income (Loss) for the Twelve Months Ended December 31, 1998 ($41,292,410) ($41,292,359)
===========================
Earnings Per Share $ (3.67) $ (3.73)
===========================
</TABLE>
Schedule of Common Stock Equivalents
------------------------------------
<TABLE>
<CAPTION>
Diluted
Average share price during period $7.8087 Diluted Net
Exercise Assumed Treas. Shs. Add'l
Stock options & warrants: Number Price Proceeds Acquired Shares
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bridge Warrants/Bank Warrants 10,000 6.2500 0 0 0
Prudential Warrants 60,000 12.2500 735,000 94,126 (34,126)
Stock options - Plan Year
1992 Stock Option Plan
01/13/93 ISO 66 2.2100 0 0 0
01/13/96 NQ 289,935 2.2100 0 0 0
04/04/94 ISO 4,500 0.9375 0 0 0
04/04/94 NQ 53,860 0.9375 0 0 0
08/09/94 NQ 156,800 1.6875 0 0 0
04/05/95 ISO 7,300 1.9375 0 0 0
11/12/96 ISO 2,500 7.5000 0 0 0
03/20/97 ISO 1,500 8.6250 12,938 1,657 (157)
04/23/97 NQ 9,000 8.1250 73,125 9,365 (365)
12/22/97 NQ 1,140 0.9375 0 0 0
1995 Stock Option Plan
07/17/96 ISO 19,750 6.2500 0 0 0
05/02/97 ISO 48,700 8.0000 389,600 49,893 (1,193)
12/22/97 ISO 31,075 10.6875 332,114 42,531 (11,456)
01/02/98 ISO 28,864 10.6875 308,484 39,505 (10,641)
06/15/98 ISO 109,200 8.6250 941,850 120,616 (11,416)
1995 Nonqualified Plan
04/05/95 NQ 85,000 1.9375 0 0 0
08/21/95 NQ 5,000 4.2500 0 0 0
12/05/95 NQ 110,000 4.2500 0 0 0
01/19/96 NQ 6,000 5.3750 0 0 0
02/01/96 NQ 12,500 6.2500 0 0 0
07/17/96 NQ 18,000 6.2500 0 0 0
05/02/97 NQ 14,000 8.0000 112,000 14,343 (343)
01/22/98 NQ 2,500 10.2500 25,625 3,282 (782)
1997 Nonqualified Stock Plan
01/03/97 NQ 253,600 7.4375 0 0 0
04/04/97 NQ 150,000 8.1875 1,228,125 157,277 (7,277)
12/22/97 NQ 220,061 10.6875 2,351,902 301,190 (81,129)
06/15/98 NQ 139,950 8.6250 1,207,069 154,580 (14,630)
06/15/98 NQ 250 8.6250 2,156 276 (26)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Common Stock Equivalents 1,851,051 (173,540)
====================================================================================================================================
</TABLE>
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
Subsidiary's Jurisdiction of
Corporate Name Incorporation
- -------------- -------------
DHS Management Services, Inc. Texas
Mobile Diagnostic Systems, Inc. Texas
Heart Institute of Tulsa, Inc. Oklahoma
Specialized Imaging Services Inc. Illinois
Alpha Scanning Service, Inc. Louisiana
Diagnostic Health Services
de Mexico, S.A. de C.V. Mexico
HomeCare International, Inc. Texas
Mobile Diagnostic Imaging, Inc. Delaware
St. Louis Mobile Ultrasound, Inc. Delaware
Advanced Diagnostic Imaging, Inc. Texas
Pediatric Echocardiographic
Diagnostic Imaging, Inc. Texas
Ultrasound Diagnostic Services, Ltd. Arizona
SoCal Diagnostic Services, Inc. California
SoCal Subsidiary I, Inc. California
SoCal Subsidiary II, Inc. California
Santa Monica Imaging Center, Limited
Partnership California (limited partnership)
MAI Acquisition Corp. Texas
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
PERIOD ENDING 12/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000895659
<NAME> DIAGNOSTIC HEALTH SERVICES, INC.
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,087,349 5,126,114
<SECURITIES> 0 0
<RECEIVABLES> 11,613,352 18,699,934
<ALLOWANCES> 1,428,636 (612,437)
<INVENTORY> 0 0
<CURRENT-ASSETS> 13,713,674 26,997,683
<PP&E> 36,341,393 37,576,561
<DEPRECIATION> (12,131,560) (8,876,887)
<TOTAL-ASSETS> 67,866,655 107,854,175
<CURRENT-LIABILITIES> 11,079,503 17,776,436
<BONDS> 37,842,635 35,310,066
747 696
0 0
<COMMON> 11,714 10,719
<OTHER-SE> 15,068,812 49,941,248
<TOTAL-LIABILITY-AND-EQUITY> 67,866,655 107,854,175
<SALES> 44,844,442 52,920,804
<TOTAL-REVENUES> 44,844,442 52,920,804
<CGS> 0 0
<TOTAL-COSTS> 76,095,046 40,367,490
<OTHER-EXPENSES> (83,778) (369,403)
<LOSS-PROVISION> 1,913,004 890,161
<INTEREST-EXPENSE> 4,341,991 4,056,301
<INCOME-PRETAX> (37,421,821) 7,976,255
<INCOME-TAX> (6,972,618) 2,215,726
<INCOME-CONTINUING> (30,449,203) 5,760,529
<DISCONTINUED> 0 (326,934)
<EXTRAORDINARY> 0 0
<CHANGES> (10,833,156) 0
<NET-INCOME> (41,282,359) 5,433,595
<EPS-PRIMARY> (3.67) 0.57
<EPS-DILUTED> (3.73) 0.48<F1>
<FN>
<F1>TOTAL COSTS FOR THE YEAR-END 12/31/98 INCLUDES NON-RECURRING CHARGES OF
$6,596,683 FOR RESTRUCTURING EXPENSES AND $24,672,291 FOR IMPAIRMENT ON
ACQUIRED ASSETS.
</FN>
</TABLE>
